Investing in equity mutual funds can be a great way to grow your money over time, but with so many options available, it can take time to know where to start. In this blog, we’ll break down the different types of equity mutual funds, explain their key features, and help you understand how they can fit into your investment strategy.
What are Equity Mutual Funds?
Equity mutual funds, as it suggests, invest in shares of different companies. The fund manager aims to provide attractive returns by diversifying investments across companies from various sectors and market capitalisations. These funds are known for potentially higher returns than term deposits or debt-based funds. However, they also carry risks because their performance depends on fluctuating market conditions.
Features of an Equity Mutual Fund
Here are the key features of an equity mutual fund:
Investment in Stocks: Equity mutual funds primarily invest in stocks or equities of companies across different sectors and market capitalisations.
Professional Management: These funds are managed by fund managers who are responsible for making investment decisions based on research and analysis.
Diversification: Equity mutual funds aim to divide the risk to reduce the impact of volatility in any single stock or sector by investing in various stocks.
Liquidity: Investors can easily buy or sell the units of equity mutual funds, usually through redemption at the fund’s Net Asset Value (NAV).
Potential for Capital Appreciation: Equity mutual fund’s primary goal is to achieve capital appreciation over the long term, thereby offering the potential for higher returns compared to fixed-income investments.
Risk and Volatility: Due to their exposure to stock markets, equity mutual funds carry a certain level of risk. The value of investments can change based on market conditions, affecting overall fund performance.
Long-Term Investment Horizon: Equity mutual funds are typically suited for investors with a long-term investment period (generally five years or more) who seek growth of their capital over time.
Expense Ratio: Funds charge a fee known as the expense ratio, which covers management fees, administrative costs, and other operational expenses. This fee is deducted from the fund’s assets and impacts the overall return to investors.
Understanding these features can help investors assess whether equity mutual funds align with their financial goals, risk tolerance, and investment time frame.
Types of Equity Mutual Funds
Below are the different types of equity mutual funds that can be categorised further by investment strategy, market capitalisation, tax treatment, and investment style:
Investment Strategy-based Equity Mutual Funds
| Category | Description | Characteristics |
| Thematic or Sectoral Funds | Focus on specific investment themes (e.g., international stocks, emerging markets) or sectors (e.g., BFSI, IT, Pharmaceutical). | Higher risk due to concentrated exposure in specific sectors or themes. Potential for higher returns if the sector/theme performs well. |
| Focused Equity Fund | Invest in 30 company stocks with specified market capitalisation criteria at launch. | A concentrated portfolio aims for high returns by selecting a limited number of potentially high-performing stocks. |
| Contra Equity Fund | Contrarian strategy investing in underperforming stocks at low prices, anticipating a long-term recovery. | Seeks opportunities in stocks that are currently undervalued but have potential for future growth. |
Market-Capitalization Based Equity Mutual Funds
| Category | Description | Characteristics |
| Large-Cap Funds | Invest predominantly (>80%) in large-cap companies (top 100 by market capitalisation). | Relatively stable with lower volatility compared to mid-cap and small-cap funds. Suitable for conservative investors seeking stability. |
| Mid-Cap Funds | Invest around 65% in mid-cap companies (101st-250th by market capitalisation). | Potential for higher returns than large-caps but higher volatility. |
| Small-Cap Funds | Invest around 65% in small-cap companies (251st and lower by market capitalisation). | There is a high growth potential but also high volatility and risk. |
| Multi-Cap Funds | Invest across large-cap, mid-cap, and small-cap stocks in varying proportions (around 65% total). | Provides diversification across market segments. |
| Large and Mid-Cap Funds | Invest around 35% in mid-cap and 35% in large-cap companies. | A balanced approach offers a blend of stability and growth potential. |
Tax Treatment-Based Equity Mutual Funds
| Category | Description | Characteristics |
| Equity Linked Savings Scheme (ELSS) | Minimum 80% investment in equity and equity-related instruments. Offers tax benefits up to Rs. 1.5 lakh. The lock-in period is three years. | A tax-saving instrument with the potential for capital appreciation. Long-term investment horizon required. |
| Non-Tax Saving Equity Funds | All other equity funds, excluding ELSS. Subject to capital gains tax on returns. | Returns are taxed as per capital gains tax rules. |
Investment Style-Based Equity Mutual Funds
| Category | Description | Characteristics |
| Active Funds | They are managed by fund managers who select stocks based on research and market conditions. | A fund manager’s expertise influences portfolio performance. |
| Passive Funds | Track market indices or segments without active stock selection. | Lower management fees; performance closely mirrors the index tracked. |
Conclusion
In conclusion, equity mutual funds offer a versatile and potentially rewarding avenue for investors looking to grow their wealth over time. By understanding the various types of equity mutual funds and their distinct characteristics—whether they are categorised by investment strategy, market capitalisation, tax treatment, or investment style—you can make more informed decisions that align with your financial goals and risk tolerance. Equity mutual funds, managed by professional fund managers, provide the benefits of diversification, liquidity, and the potential for capital appreciation, albeit with inherent risks and market volatility. By carefully selecting the type of equity mutual fund that suits your investment horizon and objectives, you can harness the power of the equity markets to achieve long-term financial success. Remember to consider the expense ratios and evaluate the fund’s performance periodically to ensure it continues to meet your investment expectations.
FAQs
Ans: Equity mutual funds pool money from multiple investors to invest primarily in a company’s stocks.
Ans: The types include large-cap, mid-cap, small-cap, extensive- and mid-cap, and multi-cap funds, each catering to different investor preferences and risk profiles.
Ans: Before selecting an equity mutual fund, consider your risk tolerance, investment goals, and the fund’s track record.
Ans: Equity mutual funds offer the chance for higher returns compared to bonds or savings accounts. They also provide diversification and professional management.
Ans: Equity mutual funds are generally recommended for long-term investment goals (5 years or more).
Ans: You can monitor the fund’s performance through its NAV (Net Asset Value), which reflects the value of each unit, and by comparing its returns to relevant benchmarks and peer funds.
Ans: Yes, many investors choose to diversify their portfolio by investing in multiple types of equity mutual funds to spread risk across different market segments.
