Equity funds are mutual funds that mainly invest in stocks. There are several types of equity funds each with its investment goal and asset allocation strategy. These funds offer a higher return on investment compared to traditional FDs but come with higher risks.
Although the majority of the population that is pro-investment would vote for mutual funds to be the best mode of investment, rarely can they say which mutual fund is the best. This is mainly due to the overwhelming array of options that are available in mutual funds. Investment requires an eye for detail and extensive research, especially when there are too many options in the market. This can be done only through a thorough understanding and awareness of the different types of schemes available. Equity funds are one such type of mutual fund and are a predominant part of investment portfolios due to their high-return potential.
Equity Funds Defined:
As the name indicates, an equity fund is a type of mutual fund with a minimum of 65% invested in equity and equity-oriented investments. The remaining 35% could be put in debts or money market securities. The basic idea behind this is to diversify the overall risk vested in the investment. It may be pertinent to note that equity funds are characterised by a high-risk possibility as compared to debt funds and hybrid funds as they are more dependent on the stock market.
Different Types of Equity Funds:
Equity funds can be classified on the basis of three broad categories, namely:
- Capitalisation of Market
- Strategies for Invention
- Tax Benefits.
1. Equity funds Based on Capitalisation of Market:
Certain equity funds invest in organisations with specific market capitalisations only. The most common types are elucidated below:
-
Small Cap Fund:
Here the majority of the corpus funds, say 65% is invested in small-cap companies. These companies, as explained by the Securities and Exchange Board of India (SEBI), are those that fall below the 250th rank in the stock exchange in terms of market capitalisation. More specifically, these companies exhibit a capitalisation of fewer than 500 crores.
-
Mid Cap Fund:
Here more than 65% of the corpus fund is allotted to mid-cap companies. Their market capitalisation ranges from Rs. 500 to 10,000 crores and ranked from 101 to 250 on the stock exchange, in terms of market capitalisation. Though these funds offer relatively good returns they present a higher rate of risk as compared to large-cap funds and are most suitable for long-term investment.
-
Large Cap Fund:
Here the corpus fund is put into large-cap companies. As per market capitalisation, these companies belong to the top 100 rankings of the stock exchange. Here both the risk quotient and the return potential are lower. Thus, this is most suitable for investors who wish to play safe.
-
Flexi- Cap/Multi-Cap/Diversified Fund:
These funds have exposure to all the three types of funds explained above. This helps the investors attain a heterogenous portfolio with a single investment. Although these funds are not as risky as a pure mid-cap fund or a pure small-cap fund, it showcases a higher risk than large-cap fund. The Flexi-cap funds are most suitable for investors with moderate risk tolerance looking for long-term gains.
2. Equity Funds with Respect to Investment Strategies:
-
Sectoral Fund:
Here the investor gets to invest the fund in companies belonging to a particular sector such as the pharmaceutical, FMCG, or banking sectors that has the potential for uninterrupted growth. The downside of these types of funds is that there is a high-risk possibility. On the other hand, if the chosen sector is prone to perform well, then the investors have a chance of reaping high returns. This schema is suitable for aggressive and active investors only.
-
Thematic Fund:
Here the funds are invested across several sectors that have a common theme. For instance, in the case of infrastructure funds, the investment happens across steel, cement, real estate, and other related industries. In comparison with the sector funds, thematic funds are more diversified. It is therefore less risky as compared to sectoral funds and is suitable for aggressive and ultra-aggressive investors.
-
Index Fund:
Here, the investment is done under one index and is only passively managed. The composition of a fund is exactly the same as the index to which it’s linked. Index funds will give more or less the same returns as the index, just like gold Exchange Traded Mutual Fund (ETF) that moves with gold prices.
3. Equity Funds Based on Tax Benefits:
Most often investors choose mutual funds to avail of tax benefits on long-term investments, the following type comes with an additional tax benefit.
Equity-Linked Savings Scheme (ELSS):
The ELSS type of equity fund enables the investor to claim tax deductions proportional to the invested amount in the respective financial year. This is in addition to the tax benefits equity funds are eligible for, with respect to long-term capital appreciation. Tax deductions can be claimed for up to ₹150000, when funds are invested in this scheme. The disadvantage of this scheme is the mandatory lock-in period of 3 years. This is one of the most preferred types of equity mutual funds as the level of risk is low and the returns are moderate if not high. This is one of the first choices of beginners who are planning to build their mutual fund portfolio.
FAQs on Equity Funds:
How many types of equity funds are there?
There are several types of equity funds including large-cap, mid-cap, small-cap, sector funds, and international equity funds.
What are equity funds and its types?
Equity funds are mutual funds that invest primarily in stocks. The main types include large-cap, mid-cap, small-cap, sector funds, and more.
Which type of equity fund is best?
The best type of equity fund depends on an individual's risk appetite, investment goal, and market conditions. Large-cap funds are generally considered safer than small-cap funds.
What are the 4 types of mutual funds?
The four main types of mutual funds are Equity funds, Debt funds, Hybrid funds, and Solution-oriented funds.
What are the 7 types of equity funding?
The seven types of equity funding are venture capital, angel investors, crowdfunding, bootstrap funding, initial public offerings, partnerships, and personal investments.
Why equity is better than FD?
Equity funds have the potential to offer higher returns compared to FDs. However, they come with higher risks.
What are the two main types of equity?
The two main types of equity are common stock and preferred stock.
Are equity funds high-risk?
Yes, equity funds come with higher risks compared to debt funds or FDs.
What is an example of an equity fund?
An example of an equity fund is the Vanguard 500 Index Fund which invests primarily in the stocks of the S&P 500.
What are different types of SIP?
The different types of SIP include regular SIP, flexible SIP, daily SIP, and trigger-based SIP.
What is SIP full form?
SIP stands for Systematic Investment Plan.
Is SIP a mutual fund?
No, SIP is a method of investing in a mutual fund. It allows investors to invest a fixed amount at regular intervals in a mutual fund scheme.
Read More:
