An equity fund is a type of mutual fund where money of various investors with the same investment objective is pooled in and invested in equity of various companies. There are different types of equity funds, based on company capital, objective, etc.
Let’s know about the types of equity mutual funds available in India, in this post.
Types of Equity Funds
There are different categories in which the SEBI breaks down the types of equity funds, viz.:
- Large-cap equity fund
In a large-cap equity fund, a type of equity fund, approximately 80% of the assets are invested in the top 100 companies or the large-cap shares. This also depends on the market capitalization. They are bound to bring good profits and are highly stable, considering they are in the top 100.
- Mid-cap equity fund
In a mid-cap equity fund, at least 65% of the asset is invested in shares of companies ranging from 101 to 250. These rankings are based on the company’s market capitalization. Though they offer high returns, they are also more volatile and carry high to very high risk potential.
- Small-Cap Equity fund
In this category of small-cap equity mutual fund, approximately 65% of asset is invested in the equity share of a company ranking below 251. The small-cap equity fund brings the highest returns in short-term but is extremely volatile.
- Large and mid-cap equity funds
35% of assets will be invested in the large-cap companies, and the other 35 will be invested in mid-cap companies. You will get better turns, and there will be less volatility considering large caps are extremely capital.
- Equity-linked saving scheme
Also known as ELSS, a lock-in period of 3 years is not the only highlight of this equity fund. In this equity fund, you will have to invest around 80% of interest in the equity. The rest 20% will be invested in the equity-related market instruments. There’s also tax exemption, which means you will get tax benefits of up to Rs. 1.5 Lakh.
- Sector funds
In sector funds, you will invest approximately 80% of your asset in a particular sector or theme. By sector, we mean it can be pharmaceutical, information technology, and such, whereas, in theme, there are sports, agriculture, chemicals, automobile, etc.
Other types of equity funds include contra funds, value-oriented funds and more.
Did you know?
The Bombay Stock Exchange is Asia’s oldest and fastest stock exchange, with over 5000 companies. In 2017, BSE became the 1st listed stock exchange of India.
Advantages of Investing in Different Types of Equity Funds
The advantages and returns of investing in equity funds are at the apex compared to other investment schemes. Below-mentioned are the advantages of investing in equity funds:
- Excellent tax benefits
Section 80C of Income Tax Act 1961, ELSS (Equity Linked Savings Scheme) gives investors tax benefits up to Rs. 46,800 on the investment of Rs. 1.5 Lakh.
- Expert help on the go
Considering you are a beginner with zero market knowledge, you can hire an asset management company. These companies will conduct market research and assess risk and trade. Unless you have intensive knowledge about trading, it is not advised to invest independently.
- Transparency
Securities and Exchange Board of India (SEBI) is regulating body for all the mutual funds which maintains transparency and security for all investors. Funds are advised to publish their net asset value (NAV) and expense ratio. This helps fund managers and research houses keep track of profitable equity funds and advise investors on which equity mutual funds are performing well.
- Maximum returns
Now, the whole point of investing in equity is to get maximum returns. Equity funds mean investing in the stocks and shares of any large-cap, mid-cap or small-cap company.
You are investing in the proportionate ownership of that particular company’s business with an equity fund. If the company you have invested in is performing well in the market, you will get higher returns and vice-versa.
- Easy to liquidate
You can redeem several units of equity funds when the net asset value is out, allowing you to liquidate your assets. This redeemed amount will be credited to your linked bank account.
Should I Invest in Equity Funds?
If you have a risk appetite and ability to handle the anxiety of investing your money, then the equity fund is the right scheme for you.
There’s a lot to lose when investing in an equity fund, especially if you are investing without actually understanding the market; now, this will be a fool’s choice.
As a beginner, you should observe, hire a fund manager, invest in a large-cap fund, and invest in the top-performing shares to maximize your returns.
Just in case you are highly experienced and financially savvy and just here to brush up on your knowledge, we have a rock-solid piece of advice for you too. Consider investing in a multi-cap equity fund, as they will offer you the opportunity to balance your portfolio and get higher returns.
Word To Remember
Net Asset Value (NAV)
NAV is the price of a unit in a mutual fund. Investors purchase stocks based on their net asset value.
Types of Equity Funds: FAQs
Small-cap, mid-cap and large cap funds are the main types of equity funds in India. Further, there are contra funds, sector funds and more.
You can withdraw the equity funds anytime as they are a liquid investment. However, some equity funds, such as ELSS, have a lock-in period of 3 years from the date of investing.
You can withdraw the entire investment from the SIP before the fixed period, but for this, you will have to shut your SIP account and also pay certain exit-fee.
Disadvantages of equity funds:
-Not fruitful in short-term
-No control over returns
-Some stable and profitable stocks are very expensive
Also Read: What is Equity Mutual Fund