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.
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