A mutual fund scheme is an investment vehicle that collects money from a group of investors to purchase different securities. Through a mutual fund scheme, you can invest in various financial securities like bonds, gold, stocks and money market instruments. When an investor opts for mutual fund investment, they own a small stake in all the investments included in the fund. However, as the needs of investors evolved so have the mutual schemes. To meet the evolved needs of the investors, several types of mutual funds can be found in the market. Moreover, these subcategories are regulated by the Securities & Exchange Board of India (SEBI). One such subcategory is equity mutual funds.
What is an Equity Fund?
Equity funds are the type of mutual fund scheme that is known for primarily investing in the equity markets. According to the current SEBI Mutual Fund categorisation, equity mutual funds are mandated to invest approximately 65% of their total assets in equity and other equity-related instruments. These funds are renowned for having the potential of generating income by investing in the stocks of companies across all market capitalisations.
What are the benefits of equity funds?
Like mutual funds, there are numerous advantages of equity funds too. Listed below are some of them:
Equity funds are professionally managed:
One of the notable advantages of equity funds is that they are managed by financial experts, also known as fund managers. They are market experts who professionally manage equity funds by studying the market. They do so by analysing the performance of various companies and after doing that investing in the performing stocks that could deliver optimal revenue to the investors.
Liquidity:
You can opt to redeem the units of an equity fund anytime on any business day at the applicable NAVs i.e., net asset values. The easy access to units shows that equity funds offer liquidity to investors. However, it is important to note that there is an exception to this. If your funds are invested in ELSS funds, you cannot liquidate unless the lock-in period, i.e., 3 years, is over.
Portfolio diversification:
While investing in an equity mutual fund, you are exposed to various stocks. Therefore, even if a few stocks in the portfolio were to underperform, you would be able to achieve capital gains from the performance of the other stocks.
What are the types of equity funds?
Before investing in equity funds, it is important to remember that equity funds are not a monolith. They have subcategories of their own. Listed below are some of them. These types of mutual funds can be classified based on these things:
Based on Investment Objective
Based on Investment Strategy
Based on Asset Allocation
Based on investment objective:
Listed below are some types of equity mutual funds based on their investment objective are:
Large-cap equity funds:
Large-cap equity funds invest in companies that rank between 1 and 100 in terms of full market capitalization. These funds are the safer option as far as equity fund-picking goes. The minimum exposure to such stocks is 80% of the total assets.
Mid-cap equity funds:
These equity mutual funds invest in companies ranking between 101 and 250 by their full market capitalization. While a safer investment option than small-cap funds, they are riskier than large-cap funds. The minimum exposure to such stocks is nearly 65% of the total assets.
Small-cap equity funds:
Small-cap mutual funds are considered the riskiest option of equity funds. They are known for investing in companies that rank above 250 in terms of their full market capitalisation (as per SEBI guidelines). While they are a riskier option than mid- or large-cap equity funds, they can also offer relatively higher revenue. Their minimum exposure to such stocks is 65% of the total assets.
Large- & mid-cap equity funds:
This type of equity mutual fund equally divides the investment of funds between large and mid-cap equity and related instruments. They have the potential to generate stable income. The mandated minimum exposure to both large-cap and mid-cap stocks is 35% each of the total assets.
Multi-cap funds:
These funds are known for investing in stocks across large-, mid-, and small-cap companies. After studying the market conditions, the fund manager decides the predominant investments. Their minimum exposure to such stocks is 65% of the total assets.
Based on Investment Strategy:
If you are an investor, you need to know the investment strategy followed by the fund manager. Investment strategy refers to the methodology used to select the stocks. The key investment strategies include top-down strategy, bottom-up strategy, value strategy, and growth strategy.
Top-down strategy:
In this strategy, the sector is chosen first and then the stocks within that sector are purchased in the portfolio.
Bottom-up strategy:
In the bottom-up strategy, well-researched stocks are bought irrespective of the sector.
Growth strategy:
Through this strategy, the fund will invest in companies that have a consistent track record of profitability and growth and are likely to sustain on this path.
Value strategy:
Through the value strategy, the fund will invest in companies that have the potential to grow exponentially in the future and are currently available at a lower value.
Based on Asset Allocation:
There are a few funds that split the portfolio allocation between predominantly equity (at least 65%) and the rest in debt funds or between domestic and international equity. While investing, one needs to look at asset allocation from a tax-efficiency perspective as per the provisions of the Income Tax Act, 1961. International equity funds that have a predominant foreign equity allocation are classified as debt funds for income tax purposes.
Equity-linked savings scheme (ELSS):
They are a tax-saving mutual fund investment scheme that invests mostly in equity and equity-related schemes. Under this scheme, the fund is invested mostly in equity and the rest in debt-related securities. Investors can claim up to ₹ 46,800 annually by investing in ELSS funds.
As numerous types of equity funds are available to investors, one can choose a scheme that suits their needs. Being aware of the different types of equity funds may help you identify the objective of each fund. This, in turn, will enable you to hold relevant funds as per your risk profile.
