Right since their inception, Mutual Funds have evolved into a preferred investment tool for many investors. However, choosing the right Mutual Fund scheme can be a difficult task due to the wide array of options available. Investment requires a careful and well-thought approach to avoid potential losses. Hence, it is imperative to understand the basics of the different types of schemes available to you. Here, we will explore Equity Mutual Funds and talk about the different types of equity funds along with their benefits and a lot more.
What are Equity Funds?
As the name suggests, Equity Funds invest in the shares of different companies. The fund manager tries to offer great returns by spreading his investment across companies from different sectors or with varying market capitalizations. Typically, equity funds are known to generate better returns than term deposits or debt-based funds. There is an amount of risk associated with these funds since their performance depends on various market conditions.
Types of Equity Mutual Funds?
There are various ways of categorizing equity funds. Here is a look at the different categorizations:
Investment Strategy-based Categorization
- Theme and Sectoral Fund– An Equity Fund might decide to follow a specific investment theme like an international stock theme or emerging market theme, etc. Also, some schemes might invest in a particular sector of the market like BFSI, IT, Pharmaceutical, etc. Here, it is important to note that sector or theme-based funds carry a higher risk since they focus on a specific sector or theme.
- Focused Equity Fund – This fund invests in a maximum of 30 stocks of companies having market capitalization as specified at the time of the launch of the scheme.
- Contra Equity Fund – As the name suggests, these schemes follow a contrarian strategy of investing. These schemes analyze the market to find under-performing stocks and purchase them at low prices under the assumption that these stocks will recover in the long term.
Market Capitalization-based Categorization
Some schemes might decide to invest in companies with specific market capitalizations only. Here are the common types:
- Large-cap Funds – which typically invest a minimum of 80% of their total assets in equity shares of large-cap companies (the top 100). These schemes are considered to be more stable than the mid-cap or small-cap focused funds.
- Mid-cap Funds-– which usually invest around 65% of their total assets in equity shares of mid-cap companies (101-250th placed companies according to market capitalization). These schemes tend to offer better returns than the large-cap schemes but are also more volatile than them.
- Small-cap Funds – which typically invest around 65% of their total assets in equity shares of small-cap companies (251st and below placed companies according to market capitalization). This is a huge list and more than 95% of all companies in India fall into this category. These schemes tend to offer great returns than the large-cap and mid-cap schemes but are also highly volatile.
- Multi-Cap Funds– which usually invest around 65% of their total assets in equity shares of large-cap, mid-cap and small-cap companies in varying proportions. In these schemes, the fund manager keeps rebalancing the portfolio to match the market and economic conditions as well as the investment objective of the scheme.
- Large and Mid-Cap Funds – which usually invest around 35% of their total assets in equity shares of mid-cap companies and 35% in large-cap companies. These schemes offer a great blend of lower volatility and better returns.
Tax Treatment – Based Categorization
- Equity Linked Savings Scheme (ELSS) – ELSS Funds is the only equity scheme which offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These schemes invest a minimum of 80% of its total assets in equity and equity related instruments. Further, these schemes have a lock-in period of 3 years.
- Non-Tax Saving Equity Funds – Except ELSS, all other Equity Funds are non-tax saving schemes. This means that the returns are subject to capital gains tax.
Investment Style-based Categorization
- Active Funds – These schemes are actively managed by the fund managers who handpick the stocks that they want to invest in.
- Passive Funds – These schemes usually track a market index or segment which determines the list of stock that the scheme will invest in. In these schemes, the fund manager has no active role in the selection of the stocks.