Discover the various types of equity mutual funds

You might be hearing all the good things about mutual funds and how beneficial it is to invest in them. And now, you may even want to start investing in mutual funds. But it is likely that you find yourself in dilemma when you look at the wide range of options available and you keep wondering about which mutual fund scheme you should invest in.
So, let’s decode one of the most popular categories of mutual funds for you: equity funds. Here, we’ll shed some lights on what equity funds are, what are the types of equity funds available, and whether you should invest in them.

What is an equity fund?

Mutual fund schemes that invest in shares of different companies are known as equity funds. They have the potential to generate relatively better returns than debt mutual funds while also carrying a relatively higher level of risk. Depending on market conditions, you can generate significant wealth over long term by investing in equity funds.

Types of equity mutual funds

There are different equity mutual fund types based on various factors including the industry sector in which the equity fund invests, tax benefit, investment style, size of the companies, and so on. The broad categories include:

Equity funds classification according to market cap mix

This categorisation is based on the market capitalisation of the companies in which the fund invests. Let’s have a look at the types of equity mutual funds based on market cap:

• Large-cap funds: If a mutual fund scheme invests more than 80% of its total assets in equity shares of the top 100 companies in terms of market capitalisation, it is known as a large-cap fund. These equity mutual fund types are characterised by relatively lower volatility as they invest in bluechip companies.
• Mid-cap funds: If a mutual fund scheme invests more than 65% of its total assets in equity shares of companies falling in ranks between 101 to 250 in terms of market capitalisation, it is known as a mid-cap fund.
• Small-cap funds: If a mutual fund scheme invests more than 65% of its total assets in equity shares of companies with a ranking of 251 and onwards in terms of market capitalisation, it is known as a small-cap fund.
• Large and mid-cap funds: A mutual fund is called a large and mid-cap fund if it invests both in large-cap and mid-cap companies. The fund must invest at least 35% of assets in large-cap and 35% in mid-cap companies.
• Multi-cap funds: If a mutual fund invests at least 75% of its total assets in equity and equity-related instruments of large-cap, mid-cap, and small-cap companies, it is known as a multi-cap fund. Minimum fund allocation in each large-cap, mid-cap and small-cap must be least 25%.

Equity funds classification according to investment strategy

There are four types of equity mutual funds depending on the investment strategy used by the fund manager:

• Sectoral funds: You can consider a mutual fund to be a sectoral or thematic fund if it invests at least 80% of its total assets in equity and equity-related instruments of a specific industry sector or theme such as IT, Pharmaceuticals, etc.
• Focused funds: If a mutual fund limits itself to investing at least 65% of its total assets in equity and equity-related instruments of up to 30 stocks, you can refer to it as a focused fund. You can find the list of stocks in the scheme documents.
• Value funds: If a mutual fund invests at least 65% of its total assets in equity and equity-related instruments of under-valued stocks based on fundamental analysis, it is called a value fund. People invest in value funds to tap into the opportunity of getting returns when the market realises the true value of the stocks. These funds are considered high-risk investments. or
• Contra funds: If a mutual fund focuses on investing at least 65% of its total assets in equity and equity-related instruments of underperforming stocks, it is called a contra fund. The main assumption behind this “contrarian” strategy of investing is to purchase the stocks at low prices and get great returns in the long term. These are also considered high-risk investments.

It must be noted that a fund house can have either value or contra funds, and not both.

Equity funds classification according to tax benefits

Dividing equity funds based on their tax benefits gives these types of equity mutual funds:

• Equity Linked Savings Schemes (ELSS): The equity funds that invest at least 80% of their assets in equity and equity-related instruments and offer tax benefits are known as Equity Linked Savings Schemes or ELSS funds. The lock-in period for ELSS funds is 3 years. You can get tax benefits up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.

Equity funds can be a preferred option for investors as they have the potential to generate returns over the long term. However, if you are planning to invest in equity funds, you must assess your investment goals, investment horizon and risk tolerance before you start looking at different types of mutual fund schemes.

FAQs:

What is the difference between actively managed and passively managed equity mutual funds?

Actively managed equity funds are the equity funds in which the fund manager picks the stocks for the scheme. The competence and experience of the fund manager play an important role here to determine the returns from the mutual fund. On the other hand, passively managed equity funds track a market index or segment to invest. The fund manager does not play an active role here. The performance is usually dependent on the market conditions.

What is the risk associated with investing in equity mutual funds?

Investing in equity mutual funds comes with certain risks. The primary risk is market volatility, which causes fluctuations in the fund's value. It's essential to understand and evaluate the risks associated with equity mutual funds before investing and consider diversification and a long-term investment horizon to mitigate some of these risks.

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

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.