Equity and tax saving mutual funds
Equity funds are mutual fund schemes that predominantly invest into the stocks of the listed companies. They are subject to market risks, however, we customise the funds distribution basis the client’s risk profile. These funds are a very good diversified return generating asset for investors with a long term horizon. Equity funds essentially aim to provide the benefit of professional management and diversification to ordinary investors.
Why equity mutual funds?
- Everything around you impacts the stock market companies revenue
(Depicted in the image to the right)
- Earn returns that well beat the inflation in long run
- Equity is the only asset consistently delivering returns in the long term
- Risk is diversified and mitigated in the longer horizon
- A good mechanism to meet various medium and long term financial goals
- Strong investing options available to invest apart from lumpsum purchases:
i) Systematic Investment Plan (SIP)
ii) Systematic Transfer Plan (STP)
iii) Systematic Withdrawal Plan (SWP)
- Streamlined taxation
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Types of equity mutual funds
Equity funds are either active or passive. In an active fund, a fund manager scans the market, conducts research on companies, examines performance and looks for the best stocks to invest. In a passive fund, the fund manager builds a portfolio that mirrors a popular market index, say Sensex or Nifty Fifty.
Furthermore, equity funds can also be divided as per the market capitalisation of the companies in which the money is invested. Basis this there are a few categories of schemes such as, Large Cap, Mid Cap and Small Cap Funds.
Also, there can be a further classification as Diversified or Sectoral / Thematic. In the former, the scheme invests in stocks across the entire market spectrum, while in the latter it is restricted to only a particular sector or a theme, say, Banking, Information Technology, etc.
To reduce the risk in the equity funds and at the same time get better returns than a fixed income instrument in a long run, balanced or hybrid funds were launched. In these funds, the fund is invested in both equity as well as debt instruments, however the proportion depends on the client’s risk profile.
Tax saving schemes or as they are popularly known as Equity Linked Saving Scheme (ELSS), are the mutual fund schemes that qualify for tax deductions under Section 80C of the Income Tax Act. Investors can park money in these schemes and claim tax deductions of up to INR 1.5 lakhs under Section 80C.
Exchange Traded Funds (ETFs) are funds that track an index, bond, commodity or a set of assets. They are similar to the index fund but can be traded on the exchanges.
Tax saving equity mutual funds or Equity Linked Saving Schemes (ELSS)
- Tax exemption under section 80C of the Income Tax Act, up to INR 1.5 lakhs
- Diversified option, where the fund manager invests across market cap, sectors and themes
- Of the total investible corpus, 80% is invested in equity and related instruments
- Subject to 3 year lock-in period, but this is lowest amongst available tax saving instruments
- Earn returns that well beat the inflation post tax in the long run
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