If you are someone who prefers to invest in equity mutual funds, then you need to understand all about the same. Equity mutual funds are managed by professional fund managers who have enough knowledge and experience.
There are different types of mutual funds as per various categories. Hence investor gets confused regarding which equity mutual fund they should invest in. In this article, we will understand about different types of equity mutual funds.
What is an equity mutual fund?
Equity mutual funds are those funds which invest in stocks of different companies. As per SEBI, the equity mutual fund scheme shall have at least 65% of its funds invested in equity or equity-related instruments.
The equity mutual funds are managed by experienced professional fund managers. They take care to invest the money of equity funds among different companies based on market capitalisation, sector, etc.
Equity mutual funds are risky as they are dependent on markets. But at the same time, they can give better returns than FDs and debt mutual funds.
What are the different types of equity mutual funds?
There are different types of mutual funds based on different categories. Let us understand each of them: –
- Equity funds based on capitalisation
Some equity mutual fund schemes are determined based on their market capitalisation. They are as under: –
- Large-cap funds
Large-cap funds invest in shares of blue-chip companies or large-size companies. The companies ranked from 1st to 100th as per market cap are blue chip companies or large-size companies. This fund can give stable returns and are less risky as compared to mid-cap funds and small-cap funds.
- Mid-cap funds
Equity funds that invest in medium-sized companies are defined as mid-cap funds. Medium-sized companies are those ranked between 101 to 250th as per SEBI. These funds are a bit volatile but can give better returns than large-cap funds in the long run.
- Small-cap funds
The equity funds that invest in small-cap companies are defined as small-cap funds. These companies are ranked 251st and above as per market cap. There are many companies in India in this category. Small-cap funds carry high risk but also can give high returns.
- Multi-cap funds
Equity funds which invest money in companies of large-cap, mid-cap and well as small-cap are defined as multi-cap funds. They invest in companies of each capitalisation in different ratios. The fund managers keep rebalancing the proportion as per the market conditions.
- Equity funds based on investment strategy
- Sectoral funds or thematic funds
The equity funds that invest in particular sectors such as pharma, banking, real estate, insurance etc are known as sectoral funds. Whereas the funds which invest around certain themes are defined as thematic funds.
This investment can be in multiple sectors based on some theme. For example, an agriculture theme can have investments in fertilizers, agri products, automobiles etc.
- Focussed funds
The focussed funds are those equity funds that invest in a few stocks. They prefer to invest in a limited number of stocks in limited sectors. They mainly invest in a maximum of 30 stocks.
- Equity funds based on tax-treatment
- Equity-linked savings scheme (ELSS)
ELSS is a solo scheme in equity mutual funds that offers income tax benefits up to 1.5 lakhs u/s 80C of the Income Tax Act. These funds invest largely in equity and equity-oriented investments with a lock-in period of 3 years.
- Non-tax savings equity funds
Apart from ELSS funds, all other equity fund schemes are non-tax savings schemes.
Which type of equity mutual fund is right for you?
As explained above, there are various types of equity mutual funds based on different categories. Now which one to select depends on your risk appetite, investment goal etc.
If you want to invest with the benefit of tax savings then you can invest in ELSS. If you have a low risk-taking capacity and want stable returns, you can go for large-cap funds. But if you want higher returns and can take risks you can go for mid-cap or small-cap funds.
If you understand a certain sector very well or want to follow a certain theme in investment, then you can prefer thematic or sectoral funds.
Conclusion
Equity mutual funds deliver higher returns as compared to other investment options. But it also carries risks as they depend on market conditions. We have categorised different types of equity mutual funds. You can invest in the equity mutual fund of your choice.