What is an equity mutual fund?
Equity funds are mutual funds that primarily invest in the stock market. Your money is invested in stocks of various companies .The main aim of an equity fund is to generate returns greater than that of fixed deposit and other fixed income securities. Equity fund invest 65% or more funds in the stock market, the remaining amount will be invested in debt and money market instruments. Why don’t they invest everything in the stock market? This is done to bring down the risk level to some extent. It is better to go for an equity fund if you have a long-term horizon of 5 years or more. These funds are ideal for building your long term wealth and fulfilling your financial goals.
What are the types of equity mutual funds?
Large cap fund
Large cap fund are those funds which invest pre-dominantly in well established companies which have a stable growth. This makes large cap funds a reliable investment. Nearly 80-90% of funds are invested in large cap stocks.
Mid cap fund
Mutual funds that invest mainly in mid cap companies are labeled as mid cap funds. These funds given returns higher than large caps during a bull phase. Invest in mid cap stocks if you have a higher risk tolerance than large caps. Nearly 65% of the funds are invested in mid cap stocks.
Large & mid cap fund
Mutual funds that invest both in large and mid-cap stocks. Minimum investment is 35% in large cap and 35% in midcap. Benefits of investing in this mutual fund is you get the safety of large cap as well as growth of mid cap stocks
Small cap fund
Mutual funds that invest pre-dominantly in small cap stocks are labeled as small cap funds. Small cap companies are young companies that seek to expand. They give high returns, but they come with a high risk as well. Investment in these funds should be done according to your risk appetite. Minimum investment has to be 65% in small cap stocks.
Multi cap fund
Multi cap funds are those mutual funds that invest in stocks with different market capitalization. Investing in Multi cap fund gives you the stability of large cap as well as the growth and higher returns of small and mid-cap. Multi cap is an ideal fund for diversification.
Dividend yield fund
Dividend yield funds are those which pre-dominantly invest 65-80% of the amount in stocks that pay dividends. Fund manager will find a company which is stable and pays dividend regularly. These funds are stable when markets are not performing well. These funds should be part of your investment portfolio to give some added stability.
Value funds are Equity mutual fund that follows a value investment strategy. Value investment strategy involves buying companies that are at a discount to their fair value. It means that the fund manager thinks that the stocks are worth much more than their current priced at.
Equity mutual funds that follow a contrarian investment strategy. A contrarian strategy involves buying stocks which have underperformed or not performed well and are not preferred by most investors. The ideology behind contra funds is that they bet on the growth of an underperforming stock. Minimum investment is 65% of the total assets.
Focused funds are funds that invest primarily in 20-30 stocks, unlike most mutual funds that invest in 50-100 stocks. According to SEBI guidelines, focused funds can invest in maximum 30 stocks where minimum 65% is invested. Funds will mention where the scheme will focus on, whether large cap, small cap or mid cap. Objective of this fund is to deliver high returns by investing in a limited number of companies, which makes it high on both risk and returns.
Mutual funds that follow a particular industry or sector fall under the category of sector/thematic funds. Sectoral funds invest in sectors like FMCG, Pharma or Technology. Thematic funds invest in a particular theme like emerging consumer companies, rural India. These funds are high on risk as they completely depend on one the performance of one sector so only invest if you positive that a particular sector will perform very well. Minimum investment is 80%
Equity linked saving scheme (ELSS)
ELSS is an open-ended equity mutual fund with income tax benefits under Section 80C of the Income Tax Act up to 1,50,000.