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Context

• In June 2024, India's equity mutual funds witnessed a significant increase in inflows, rising by 17% sequentially to reach a record high of Rs 40,608 crore (approximately $5 billion).
• Since February 2021, domestic investors have contributed Rs 5.9 trillion to equity mutual funds, surpassing foreign inflows of Rs 33,360 crore over the same period.

READ ALL ABOUT MUTUAL FUNDS: https://www.iasgyan.in/daily-current-affairs/mutual-fund#:~:text=The%20funds%20collected%20from%20investors,known%20as%20the%20expense%20ratio.

Equity Mutual Funds

• Equity Fund Definition: Also known as stock funds, equity funds pool money from multiple investors to primarily invest in stocks of publicly traded companies.
• Type of Mutual Fund: Equity mutual funds are mutual fund schemes designed to provide investors with opportunities for potential growth.
• Managed by Professionals: Professional fund managers oversee equity investments, making strategic decisions to maximize investor returns.
• Return Sources: Investors in equity funds earn returns through:
• Capital Appreciation: Increase in the value of the fund's underlying equity investments.
• Dividends: Distributions of profits from the companies held within the fund.

SEBI Regulations

• SEBI mandates that equity funds must invest at least 65% of their corpus in equity and equity-related instruments.

Types of Equity Mutual Funds

Based on Market Cap

• Large-cap Fund: Invests primarily in top 100 companies by market capitalization, offering stability with potential for steady returns.
• Mid-cap Fund: Targets companies ranked 101st to 250th in market cap, balancing risk with growth potential.
• Small-cap Fund: Focuses on smaller companies beyond the top 250, offering high growth potential but with higher volatility.
• Multi-cap Fund: Diversifies across market caps (large, mid, small), ideal for balanced risk exposure.

Specialized Funds

• Thematic Equity Fund: Concentrates on specific themes or sectors like Technology or Infrastructure, suitable for thematic investing.
• Contra Equity Fund: Invests in underperforming stocks with potential for turnaround, higher risk but potential for high returns.
• Tax Saving Fund (ELSS): Offers tax benefits under Section 80C, with a three-year lock-in period.

Focused Funds and Sectoral Funds

• Focused Equity Fund: Invests in a concentrated portfolio (up to 30 stocks), balancing diversification with focused investment.
• Sector Equity Fund: Focuses on specific sectors like Banking or Pharma, providing targeted exposure to growing sectors.

Benefits of Investing in Equity Mutual Funds

• Diversification: Spreads risk across sectors and market caps, mitigating individual stock volatility.
• ROI Potential: Offers potential for the highest returns among mutual funds, appealing to risk-tolerant investors.
• Affordability: Allows investment through SIPs starting as low as ₹500, making it accessible to small investors.
• Tax Benefit: Tax-saving equity funds like ELSS offer deductions up to ₹1.5 lakh under Section 80C, reducing taxable income.
• Liquidity: Provides easier liquidity compared to fixed deposits and other long-term investments.

Taxation on Equity Mutual Funds

• Capital Gains Tax:
• Short-term gains taxed at 15%.
• Long-term gains over ₹1 lakh taxed at 10%, without indexation benefit.
• Loss Set-Off: STCG losses can offset both LT and ST gains; LT losses can offset only LT gains, with carry-forward up to 8 years.
• Dividend Taxation: Dividends now taxable under 'other income' as per individual income tax slab.

Recent Performance of Benchmark Indices

• The NSE Nifty 50 has surged by approximately 65% over the past 40 months, supported by sustained mutual fund inflows, stable earnings, and robust macroeconomic growth compared to other major economies.

Flow Distribution Across Market Segments

• Inflows into large-cap mutual funds spiked by 46% to Rs 970 crore, marking a three-month high. This growth is underpinned by policy continuity and macroeconomic stability.
• Conversely, inflows into small-cap and mid-cap funds moderated, declining by 16% and 3% respectively, with June figures standing at Rs 2,263 crore and Rs 2,528 crore.

Investor Trends and Insights

• A significant portion of recent mutual fund flows shifted from large-caps to small- and mid-caps due to performance chasing.
• However, elevated valuations in small- and mid-caps are prompting investors to diversify their allocations towards large-cap and multi-cap funds.

Rise in Multi-Cap and Sectoral Funds

• Multi-cap or diversified equity funds saw robust inflows, reaching a 27-month high of Rs 4,709 crore. These funds spread investments across various stocks to mitigate risks associated with concentrated holdings.
• Sectoral or thematic funds, focusing on specific sectors or themes, attracted the highest inflows among equity mutual fund schemes for the second consecutive month, amounting to Rs 22,352 crore.

Market Performance in June 2024

• Both the Nifty 50 and BSE Sensex recorded gains of about 7% each in June, marking their strongest month in the current year.
• Small-cap indices, which are more domestically oriented, also performed well, with gains of 9.7% and 7.8% for small-cap and mid-cap indices, respectively.

These trends underscore robust investor confidence and strategic shifts in portfolio allocations amidst changing market dynamics.

READ ALL ABOUT MUTUAL FUNDS AND MF SECTOR IN INDIA: https://www.iasgyan.in/daily-current-affairs/mutual-fund#:~:text=The%20funds%20collected%20from%20investors,known%20as%20the%20expense%20ratio.

PRACTICE QUESTION Q. Examine the growth trajectory of India's mutual fund industry, highlighting key factors influencing its expansion over the last decade. Discuss the role of regulatory reforms and changing investor preferences in shaping the industry's dynamics.

SOURCE: TOI