Equity Funds

Equity Funds can earn in two ways:

• One, by buying shares of a company at a lower price and selling it at a higher price. As mentioned earlier, the Fund Manager keeps tracking the market and decides which stock to exit and where to invest. So if there is a stock whose price has gone up substantially and the Fund Manager believes it is the right time to sell, he will do so. The gain made by selling at a higher price than what he bought the stock for is Capital Gains. The Fund Manager then decides where to reinvest these gains so that money also grows. This is where compounding comes into play. You earn returns on the returns generated by your investments.
• The second source of returns for Mutual Funds is the dividends distributed by the companies. Since Mutual Fund owns a part of the business, if the business does well, the Fund gets the share of profit in the form of dividends. The Fund Manager decides how to invest that dividend received.

A fund that has a minimum of 65% in equity or equity-oriented securities is deemed as an equity-oriented fund for the benefit of computing tax. All other schemes are deemed as Other schemes

• Investors keen to invest in Equities but don't have the expertise or the time : There are many people who want to invest in stock markets. However, they simply cannot do it because they don't have the time to do the necessary research and constantly track markets. For such investors, Equity Mutual Funds offer an opportunity. All one needs to do is pick a good fund and invest in it regularly. Rest will be taken care of by the fund manager. They will analyze various technical and fundamental indicators such as the profitability of any company, its ability to survive challenging phases, the sector in which it operates, and so on.
• Investors who want to Start Equity Investing with a Small Amount: Many investors want to invest in the equity markets but cannot do so because they want to invest small amounts. Through Equity Funds, one can start with as low as ₹100.
• Investors who can Stay Invested for More than 5 Years: Equity Funds can be volatile in the short-term, but they have the potential to generate handsome returns in the long run. Therefore, investors whose goals are more than 5 years away can look at Equity Funds. Examples of these long-term goals are retirement, children's education, etc. Even if an investor does not have any goal in mind and just wants to get higher returns on his investments and can stay invested for a minimum of 5 years, Equity Funds can be a good option.
• Investors looking to Save Tax and Grow their Wealth: Equity Funds can also be useful for investors who want to have the best of both worlds, i.e., tax-savings and long-term wealth creation. ELSS or Equity Linked Saving Schemes is a type of Equity Fund that offers tax-saving benefits under Section 80C of the Income Tax Act. By investing in these funds, investors can reduce their taxable income by ₹1.5 lakh. And at the same time earn good returns from these investments.

• Dividends and capital gains earned from Equity Funds are liable for taxation. Capital Gains are the difference between the price at which the mutual fund units are purchased and the price at which they are redeemed or sold.
• Investors get dividends if they opt for the Dividend Plan of the Equity Fund. In this plan, a dividend is announced by the Equity Fund when there is surplus corpus available to distribute to investors.
• Dividends earned by an investor are added to his income and taxed as per his income tax slab. So if the investor comes under the 20% tax slab, there will be a 20% tax on the dividend earned by him. And similarly, if the investor comes in the 30% tax bracket, the dividends earned will be taxed at 30%.
• In the case of Capital Gains, taxation will depend on the length of time for which an investor holds a mutual fund's units. If the holding period is less than 12 months, there will be Short-Term Capital Gains (STCG) tax at 15% on the gains. For example, if the Short-Term Capital Gain is ₹1 lakh, the investor will have to pay ₹15,000 as STCG tax.
• If the holding period is more than 12 months, the gains will be liable for long-term capital gains (LTCG) tax at 10% on the gains exceeding ₹ 1 lakh. For instance, if the LTCG is ₹1.5 lakh, then the taxable amount is ₹50,000, and you have to pay ₹5,000 (10% of ₹50,000) as LTCG tax. But if the LTCG is ₹90,000, then the taxable amount is zero.