Introduction to Equity Mutual Funds and their Types

Investors' preferences have evolved with the introduction of mutual funds. Securities and Exchange Board of India (SEBI) allows Asset Management Companies (AMCs) to float several kinds of mutual fund schemes having a unique objective. Investors can invest if a particular mutual fund fits their goals and risk appetite.

Equity mutual funds are generally popular among investors as they can help earn decent returns. However, despite their popularity, confusion persists about the difference between equity and mutual funds.

This article will help clear it up. We’ll dive deep into equity fund meaning, types of equity mutual funds, and reasons to invest in equity mutual funds.

What is equity?

Equities are shares in a company. When any company provides equities, it sells partial ownership in the company. The shares are listed and traded daily on stock exchanges, with their value changing based on several factors, such as the company's financial health, economic outlook, and prevailing interest rates.

You can buy any company's shares, but ensure you research the company's fundamentals and understand the market sentiment when investing in equity. Mutual funds could be beneficial as a fund manager does all the work for you.

What is an equity fund?

An equity mutual fund invests in stocks of distinct companies depending on the investment goals of the scheme. Such funds can be a good choice if you are aiming for capital appreciation, i.e. to expect an appreciation of company stocks or bonds held by you an investor. This is because, these funds are usually known to have the potential for wealth creation. If you are looking to invest for the long run and want to gain exposure in the stock market, you can invest in equity mutual funds.

Types of equity funds

As per the company's capital, equity funds are divided into:

1. Large-cap funds

Large-cap funds invest at least 80 per cent of their assets in large-cap companies. Large-cap companies are the top 100 companies based on market capitalisation. These companies have a proven track record, are well established, have a high potential of providing reasonable returns, and are less volatile.

2. Mid-cap funds

Mid-cap funds invest at least 65 per cent of their assets in mid-cap companies. Mid-cap companies rank between 101 and 250 in terms of market capitalisation. They can be more volatile but may generate decent returns.

3. Large and mid-cap funds

Large and mid-cap funds invest at least 35 per cent of their assets in both the large-cap and mid-cap companies. The rest of the 30 per cent of assets may be invested in equities other than mid and large cap or/and money market instruments, debt, and other securities as permitted by SEBI.

4. Small-cap funds

Small-cap funds invest at least 65 per cent of their assets in small-cap companies. Small cap companies rank from 251 and above in terms of market capitalisation. They have the potential to help you earn high returns, although you must bear with their volatility.

5. Flexi cap funds

Flexi cap funds invest in the companies throughout market capitalisation, i.e., small-cap, mid-cap, and large-cap stocks. A flexi cap mutual fund allows you to diversify your investment portfolio throughout companies of distinct market capitalisation, lowering volatility and mitigating risks.

Strategic equity mutual funds

You can also invest in strategic equity mutual funds, which invest in ideas. A few examples include:

1. Sectoral funds

Sectoral funds are mutual funds that place assets in specific sectors like technology, infrastructure, real estate, FMCG, etc.

2. Contra/Value funds

Such funds analyze, assess, and invest in underperforming stocks with the assumption that such stocks will recoup over the long term.

Tax-saving mutual funds

Investing in a particular type of equity mutual fund may help you save tax and earn decent returns.

1. ELSS – Equity Linked Savings Scheme (ELSS) is a tax-saving equity mutual fund with a three-year lock-in period. ELSS is the only tax-saving mutual fund eligible for a tax deduction as per Section 80C.

Why invest in equity mutual funds?

Equity mutual funds are popular because they offer unique value. They come with the following benefits:

• Decent returns – Equity funds are known for delivering decent returns. As per historical returns, investments directed towards equities may help tackle inflation.

• Diversified portfolio – To lower the risk intensity, investments are exposed to distinct sectors throughout market capitalisation. Choosing a diversified portfolio is prudent, especially during testing market conditions. This is because if few stocks witness depreciation, other stocks may outperform to compensate for the losses.

• Professional management – A professional manager with adequate knowledge of the market monitors every mutual fund scheme. Fund managers conduct critical analysis and make essential decisions to fulfil the fund's objectives.

With multiple types of equity mutual funds now available, you can choose according to your preference, financial goals, and risk appetite. However, for this, you need to understand the inner workings of equity mutual funds.

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