Equity mutual fund
Also written Equity mutual fund (65% rule) · Equity fund · Equity mutual funds
A mutual fund that invests in shares to pursue growth, professionally managed and diversified across large, mid or small caps, sectors and investment styles.
In plain language
Buying shares yourself takes time, skill and a fair sum of money to spread risk well.
An equity mutual fund does that work for you. It pools money from many investors. A professional then invests that pool in a wide basket of shares.
How it works
Equity funds invest in equity instruments to meet the objective of growth. Portfolio construction follows regulations ensuring a minimum level of diversification and risk mitigation, and the fund is managed by professional fund managers who make and monitor the investment decisions.
Schemes vary widely — large, mid or small cap, sector funds, and different strategies and investment styles — giving investors a choice without requiring them to pick individual stocks themselves. Costs are borne by the scheme, limited by regulation, and borne indirectly by investors. Tax on portfolio-level decisions is attributed to the scheme (often with beneficial treatment), while tax on the investor's own buy/sell decisions is borne by the investor directly. Investors do not directly hold the underlying securities, though they are the beneficiaries of them.
Taxability (as covered in Chapter 6): long-term capital gains above Rs 1.25 lakh from equity funds are taxed at 12.5%, while short-term gains are taxed at 20%.
A worked example
Mr Rathore invests Rs 10,000 a month via SIP into a large-cap equity mutual fund as part of his accumulation-stage retirement portfolio, choosing not to pick individual shares himself. The fund's professional manager decides which stocks to hold and when to adjust the portfolio, within the diversification limits the regulations impose on the scheme.
After several years his units are worth Rs 9 lakh against Rs 6 lakh contributed, a gain of Rs 3 lakh. Since the gain, being long-term, exceeds the Rs 1.25 lakh exemption threshold, the taxable portion — Rs 3 lakh minus Rs 1.25 lakh, i.e. Rs 1.75 lakh — is taxed at 12.5% when he redeems, rather than at his marginal income-tax rate.
Why NISM asks about it
Chapter 2, section 2.10.1 (Equity Instruments), covers equity mutual funds as one route to equity market participation alongside direct investment and Portfolio Management Services, and Chapter 6's mutual fund taxability table applies the current LTCG/STCG rates to it. Expect a question comparing the three routes (direct, PMS, mutual fund) on cost, tax and effort.
Common exam traps
- Investors do not directly hold the underlying shares in an equity mutual fund — they hold units of the scheme, which in turn holds the shares. This distinction matters for how tax and voting rights work.
- LTCG above Rs 1.25 lakh is taxed at 12.5%; STCG is taxed at 20% — the exemption threshold applies only to long-term gains.
- Costs are borne by the scheme but indirectly paid by investors through the expense ratio — "the scheme bears the cost" does not mean investors are unaffected by it.
Check yourself
1.Under a non-discretionary Portfolio Management Service, who takes the investment decisions?
- a)The portfolio manager takes all decisions without consulting the investor
- b)SEBI approves each transaction before it is executed
- c)The mutual fund's trustees decide on the investor's behalf
- d)The investor takes the decisions on investment choices and timing, on the portfolio manager's advice and information, and the portfolio manager executes them
Show the answer
Answer: (d) The investor takes the decisions on investment choices and timing, on the portfolio manager's advice and information, and the portfolio manager executes them
The workbook says a PMS can be either a discretionary PMS, where the portfolio manager manages the portfolio in alignment with the investor's requirement or a non-discretionary PMS where the portfolio manager will provide advice and information to the investor who will themselves take the decisions on investment choices and timing of the investment. The portfolio manager will execute the decisions taken by the investor. So option D is correct.
Why the others are wrong:
- Option A describes the discretionary PMS.
- Option B: SEBI regulates the market but does not approve individual transactions.
- Option C: trustees belong to mutual funds, where they are appointed to take care of the interests of the investors in the various schemes. They have no role in a PMS account.
A PMS contrast to remember: in a PMS, transactions in the investor account lead to transaction costs and taxes. In an equity mutual fund, tax implications arising from portfolio decisions are attributed to the scheme and investors do not directly hold the securities.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Net Asset ValueThe net assets of a mutual fund scheme divided by the number of units outstanding — what one unit of the scheme is worth on a given day, after every liability except the unitholders' own.
- Mutual fundA trust registered with SEBI that pools money from many investors and invests it in securities on their behalf — not a different product from shares and bonds, but a different way of owning them.
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
- Defensive stocksShares of companies whose product demand and revenues barely respond to the business cycle — such as medicines and health services — used to reduce a portfolio's unsystematic risk.
- Market-linked return instrumentsInvestments whose return is not known in advance because it depends on the issuer's performance and on market prices — equity shares, mutual funds and listed bonds, in the workbook's own list.
- Peer group comparisonJudging a fund against other similar actively managed funds rather than against an index — popular, but only sound if the funds follow comparable strategies and their risk is compared alongside their return.
- Investment styleThe consistent approach a fund manager takes to picking securities inside a given mandate — such as a credit quality or interest-rate sensitivity in debt, or a market-cap segment in equity.