Equity Mutual Funds typically invests their assets into shares or stocks of different companies across market
capitalization or particular market cap with an objective of generating optimal returns over the long run. They
however, also involve relatively higher risks (basis the scheme) and are highly volatile in nature. The fund manager
of an equity mutual fund
scheme could attempt to garner optimal returns by spreading the investment across companies from a
variety of sectors. However, the types of securities chosen are usually based on the theme of the mutual fund
scheme. All this is basis the asset allocation and investment strategy.
Types of equity mutual funds:
Based on market capitalization -
Large-Cap Funds: These funds typically invest a major part of their total assets in the top 100 large-cap
companies listed on the market. These might offer comparatively better returns to investors with a more conservative
approach to risk and long term investment.
Mid-Cap Funds: Mid-cap funds invest the major part of their total assets in equity of mid-cap companies which
fall between the 101st to 250th place on the market. While more volatile, mid-cap funds have the potential to offer
higher returns than large-cap funds.
Small-Cap Funds: Small Cap companies hold ranks beyond the 250th place in the market capitalization. Small-cap
funds invest the major part of their total assets in these companies. Small-cap companies are subject to high
volatility but have a tendency to also offer higher returns over the long run.
Multi-Cap Funds: As is apparent by the name, multi-cap funds
spread the investment across categories of large-cap, mid-cap and small-cap companies. The proportion of
distribution may vary as per the scheme’s objective. Multi-cap funds benefit from the potential higher returns of
mid- and small-cap investments while still having the ability of large-cap investments to balance the risk to a
certain extent.
Large and Mid-Cap Funds: These types of funds divide assets between large and mid-cap companies. Large- and
mid-cap funds also benefit from each category with the mid-cap equity providing the potential for higher returns and
the large-cap equity providing capital appreciation/lower risk compared to midcaps.
Basis the Investment Strategy:
Sectoral Funds: Equity schemes that invest in a specific sector or industry of the economy such as energy,
infrastructure, etc.
Thematic Funds: Equity schemes that invest in stocks based on a particular theme. The themes chosen by the
schemes may revolve around areas such as defense, commodity etc.
Focused Funds: A type of equity fund that follows an investment strategy of having a concentrated portfolio
where it invests in a limited number of stocks. As per the SEBI guidelines, a focused fund can invest in a minimum
of 30 stocks.
(*Investors please note that the above list is not exhaustive)
Equity funds can also be classified according to tax treatment: This category includes Equity Linked Saving
Schemes (ELSS) which offers tax deduction benefits and is subject to a lock-in period of 3 years.
Here are some of the features of equity mutual funds:
Capital gains: On redemption of an equity mutual fund scheme, investors could earn capital gains. Redeeming
the scheme within 12 months invites short-term capital gains tax of 15%. Redeeming your units from the scheme after
12 months will invite long-term capital gains tax of 10% but only if the gains exceed INR 1 lakh per year.
Diverse portfolio: Equity mutual funds aim to expose the investor to a diverse variety of equity shares.
Investors can take advantage of this diversity and seek to minimize overall risk in their investment portfolio.
When considering investing in equity mutual funds, it would be judicious of an investor to first be clear of their
financial objectives, risk appetite and investment time horizon. This will help the investor choose a suitable
Mutual Funds scheme to fulfill their requirements. A financial
advisor can be consulted for guidance on the same.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
