Want To Invest In Equity Mutual Funds? Know The Different Kinds And Their Benefits

By investing in equity funds, the fund manager tries to provide good returns by distributing his investments across firms in different sectors or capitalisation

It is important to pick funds based on your risk appetite, investment goals, and liquidity. ( Image Source :Getty )

A mutual fund scheme is known as an Equity mutual fund if the fund uses more than 60 per cent of its assets to invest in the equity holdings of various firms. By investing in equity funds, the fund manager tries to provide good returns by distributing his investments across firms in different sectors or capitalisation. 

The remainder of the balance amount can be used by the fund manager to invest in money market instruments or debt securities according to the investment plans and objectives. 

Kinds Of Equity Mutual Funds

When considering an equity fund to invest in, there are several types that a manager can look into and decide further, based on the type of returns it gives. 

Investment Strategy-Based Funds

Thematic or Sectoral Funds

An equity mutual fund can opt to follow a particular investment theme such as an international stock theme, emerging market theme or a specific market sector like the BFSI, IT, Media, etc. Sectoral funds pose a higher risk, however, as they follow a certain sector or theme. 

Focused Equity Fund

These funds infuse their investments in a maximum of 30 stocks of firms having a particular market capitalisation during the scheme’s launch time. 

Contra Equity Fund

These schemes study the market and invest in underperforming stocks at lower prices with the assumption that these will recover in the long term. 

Market Capitalisation-Based Funds

Large Cap Funds

These funds typically invest at least 80 per cent of their overall assets in equity shares of large-cap firms, essentially the top 100. Due to their investment in the larger firms, these funds are considered quite reliable.

Mid Cap Funds
These funds put about 65 per cent of their overall assets in the shares of mid-cap companies, which are placed 101-250th according to the market capitalisation. These schemes offer better returns than large-cap funds due to their dynamic nature, however, they also are much more volatile than other funds. 

Small Cap Funds

These funds generally invest about 65 per cent of their total assets in the shares of small-cap firms, which are placed 251st and below according to their market valuation. Over 95 per cent of firms in India fall in this category. These funds provide good returns, however, are also very volatile. 

Multi Cap Funds

These funds generally invest 65 per cent of their total assets in equity shares of large cap, mid cap, and small cap companies in different quantities. The fund manager keeps shuffling between the categories to maintain a balance in the portfolio to correctly mirror the market sentiment and economic conditions, along with the investment aim of the fund.

Tax-Based Funds

Based on the tax benefits provided on the gains of the funds, there are broadly two kinds of funds. These are Equity Linked Savings Scheme (ELSS) and Non-Tax Saving Equity Funds. While the former allows investors to avail tax benefits of up to Rs 1.5 lakh under Section 80C of the I-T Act, the remaining funds fall under the non-tax saving category. This essentially makes the capital gains made from the funds subject to taxation. 

Investment Approach

Based on the investment approach taken by the fund managers, the funds are divided into two kinds, namely, active and passive funds. In active funds, the managers are much more involved in selecting the stocks to invest in, while the passive funds typically follow a market index or segment. The index decides which stocks to invest the fund in, while the fund manager plays no active role in the selection of stocks. 

Benefits Of Equity Funds

Growth - These funds provide great opportunities for growth with higher returns as against fixed-income financial instruments like fixed deposits or bonds. 

Tax Benefits - Certain funds such as ELSS help taxpayers claim deductions on their capital gains from investing in the equity funds. It not only helps them save tax but also adds to their wealth creation in the long run. 

However, like everything related to the stock market, the equity funds should also be invested in with caution. These funds can be quite volatile and fluctuate. It is important to pick funds based on your risk appetite, investment goals, and liquidity. You should also opt for a professional to help you understand the funds and how they can add value to your portfolio.