Equity

Features of an Equity Mutual Fund

1. Returns: Equity mutual funds are among the most high-return funds from the mutual fund spectrum. Since these funds are concentrated on equities, they come with the highest return rates.
2. Tax Benefits: You can gain tax benefits with the investments in these funds.
3. Risk: The risk factor of equity funds is high. Since the majority of this fund is invested in equities, it is highly associated with market fluctuations.
4. Expense Ratio: These funds also tend to have a higher expense ratio than their counterparts, given the requirement of constant management.
5. Long-Term Investments: These funds are suitable for long-term investors, given that they perform well in the long term.

Types of Equity Mutual Funds

Investment Strategy-based Categorization

1. Thematic or Sectoral Funds: 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.
2. 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.
3. 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:

1. 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.
2. Mid-Cap Funds - 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 (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.
3. 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.
4. 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.
5. 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

1. Equity Linked Savings Scheme (ELSS) - ELSS 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.
2. 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

1. Active Funds - These schemes are actively managed by the fund managers who handpick the stocks that they want to invest in.
2. 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.

How Does an Equity Mutual Fund Work

A Mutual Fund scheme is classified as an Equity Mutual Fund if it invests more than 60% of its total assets in the equity shares of different companies. The balance amount can be invested in money market instruments or debt securities as per the investment objective of the scheme.

Further, the fund manager can choose to invest in a growth-oriented or value-oriented manner and select companies according to his assessment of the investment generating maximum returns.

Why Should You Invest in an Equity Mutual Fund?

Equity funds, unlike other low-risk funds, give you a greater return percentage. It comes with a high potential for your wealth creation journey and to diversify your portfolio.

These mutual funds can also help you in several other ways, such as being an investment for hedging against inflation, beating economic growth, outperforming fixed-return investment plans, and much more.