Equity Oriented Mutual Fund Schemes Explained 

Mutual Funds Classification

Types of mutual fund schemes based on asset classes:

1. Equity Schemes – Funds which invest predominantly in equity securities
2. Debt Schemes – Funds which invest predominantly in debt securities
3. Hybrid Schemes – Funds which enjoy the flexibility to allocate their portfolio between equity/ debt as per the scheme objective

Further, for the purpose of taxation, the Income Tax Act, 1961 classifies mutual funds into only two categories – equity-oriented mutual funds and non-equity-oriented mutual funds.

What is an equity oriented mutual fund scheme?

Equity-oriented mutual funds schemes are mutual fund investment options which invest at least 65% of the assets or the portfolio size in equities and equity related instruments. As such, the portfolio of equity-oriented mutual funds will be skewed in the favour of equity investments.

As per the classification guidelines by the Securities and Exchange Board of India (SEBI), equity-oriented mutual fund schemes may be classified into 11 types:

Types of mutual fund schemes based on investment style

1. Multi-Cap Fund

Such funds enjoy the flexibility to invest across the market capitalizations with minimum 65% in domestic equities. As such, it may invest across the large cap, mid cap, and small cap stocks.

2. Large Cap Fund

Such funds need to invest a minimum of 80% of their portfolio in equity related instruments of large-cap companies. Large Cap companies are defined as the top 100 companies in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed. As per the latest list issued by the Association of Mutual Funds of India for the half year ended 31st December 2018, the cut-off for large-cap companies is at the average market cap of ₹28,332 crores.

3. Mid Cap Fund

Such funds need to invest a minimum of 65% of their portfolio in equity related instruments of mid-cap companies. Mid Cap Companies are defined as the companies featuring at Rank 101st to 250th in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed. As per the latest list issued by the Association of Mutual Funds of India for the half year ended 31st December 2018, the average of market cap for mid-cap companies ranges from ₹8,589 crores to ₹27,944 crores.

4. Large & Mid Cap Fund

Such funds need to invest at least 35% in equity related instruments of large-cap stocks and further, at least 35% in equity related instruments of mid-cap stocks.

5. Small Cap Fund

Such funds need to invest a minimum of 65% of their portfolio in equity-related instruments of small cap companies. Small Cap companies are defined as the companies featuring at Rank 251 st onwards in terms of full market capitalization, calculated as an average of market cap across all stock exchanges where such stocks are listed. As per the latest list issued by the Association of Mutual Funds of India for the half year ended 31 st December, 2018, the listed companies below the average market cap of ₹8,519 crores are all small-cap companies.

6. Dividend Yield Fund

Such funds predominantly invest in dividend yielding stocks with a minimum of 65% of their portfolio in equity related instruments.

7. Value Fund

Such funds follow a value investment strategy with a minimum of 65% of their portfolio in equity related instruments.

8. Contra Fund

Such funds follow a contrarian investment strategy with a minimum of 65% of their portfolio in equity related instruments.

9. Focused Fund

Such funds are focused on the number of stocks in a portfolio and thus carry a maximum of 30 stocks in the portfolio. Further, such schemes must clearly outline where the scheme intends to focus i.e., multi-cap, large cap, mid cap, and small cap and further invest a minimum of 65% of their portfolio in equity related instruments.

10. Sectoral/ Thematic Fund

Such funds aim at capturing investment opportunities in a particular sector/ theme. Sectoral funds make investments in a particular industry or area of the economy, such as pharmaceuticals, fast-moving consumer goods, technology, or infrastructure. Thematic funds, on the other hand, invest in industries based on a specific investment theme, such as investing solely in foreign equities or in up-and-coming consumer enterprises. These funds are required by SEBI (Securities and Exchange Board of India) regulations to invest at least 80% of their capital in equities related to a certain subject. The success of each of these areas or investment topics affects the performance of the corresponding funds.

11. Equity Linked Savings Scheme

Such funds need to invest at least 80% of their portfolio in equity related instruments. Further, such funds carry a lock-in period of 3 years from the date of investment and are eligible for tax deduction u/s 80C of the Income Tax Act, 1961.

Tax treatment for equity oriented mutual fund schemes

It is important to know about the equity oriented mutual fund taxation. The returns from mutual fund schemes are taxed as Capital Gains in the hands of investors. The gains from equity oriented mutual fund schemes are classified as short-term capital gains if the investment in such funds has been for a period of less than 12 months. If the investment are held for more than 12 months, the gains will be taxed as long term capital gains. Short term capital gains are taxed at 15% (plus applicable cess and surcharge), whereas long term capital gains are tax at 10%.  Further, long term capital gains from equities and equity oriented mutual fund schemes are exempt up to ₹1 lakh a year.

Disclaimer:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

To know about the KYC documentary requirements and procedure for change of address, phone number, bank details, etc. please visit https://www.utimf.com/servicerequest/kyc. Please deal with only registered Mutual funds, details of which can be verified on the SEBI website under "Intermediaries/market Infrastructure Institutions". All complaints regarding UTI Mutual Fund can be directed towards service@uti.co.in and/or visit www.scores.gov.in (SEBI SCORES portal). This material is part of Investor Education and awareness initiative of UTI Mutual Fund.