Know About Different Equity Fund Options Available In India

Equity funds are those mutual fund schemes that primarily invest in the equity markets. As per the current SEBI Mutual Fund categorization, equity mutual funds are mandated to invest at least 65% of their total assets in equity- and equity-related instruments. These funds have the potential to generate returns by investing in the stocks of companies across all market capitalizations.

Types of Equity Mutual Funds

Equity funds can be categorized based on the investment mandate and primary investment avenues. Knowing them can help you optimize your investments.

Here are the different types of equity mutual funds available to an individual:

I. Based on market capitalization

According to the capital of the company, equity funds are further sub-categorized into:

1. Large-Cap Equity Mutual Funds

As per the SEBI guidelines, these schemes invest in companies that rank between 1 and 100 in terms of market capitalization. Large-cap equity funds are considered to be the least risky investments compared to other types of equity mutual funds. What’s more, they are also known to offer stability and sustainable returns over time.

2. Mid-Cap Equity Mutual Funds

These schemes invest in companies that rank between 101 and 250 in terms of market capitalization. These funds are considered to be less risky than small-cap equity funds but riskier than large-cap equity funds. However, mid-cap stocks tend to offer better growth potential than large-cap stocks.

3. Small-Cap Equity Mutual Funds

These schemes invest in companies that rank above 250 in terms of market capitalization. These funds are considered to be riskiest compared to large- or mid-cap equity funds but also have the potential to deliver the highest returns.

4. Large- and Mid-Cap Equity Mutual Funds

These mutual fund schemes equally divide the equity allocation between mid-and large-cap funds to offer high returns as well as stability. The allocation to both such market caps is 35% each of the total asset value.

5. Multi-Cap Equity Mutual Funds

Multi-cap equity mutual fund schemes invest in stocks across all market capitalizations, i.e. small-, mid-, and large-cap companies. The fund manager decides the proportion of these investments according to prevailing market conditions. These funds are generally meant for investors who do not want to be restricted to any particular industry while simultaneously seeking exposure across the market.

II. Based on Investment Style

Most equity funds mentioned above follow an active investing style, i.e., the fund manager decides the composition of the portfolio. However, there are mutual fund schemes whose portfolio composition mimics a specific index.

Meanwhile, equity mutual funds that focus investments on a particular theme or sector fall under this category. Sectoral funds invest in a specific industry or sector of the economy as specified in the offer documents, such as pharma, FMCG, technology, or infrastructure. The returns are dependent on the performance of the respective industries/sectors.
On the other hand, thematic funds invest in sectors based on a particular investment theme, such as investing only in international stocks or in emerging consumer companies. As per SEBI (Securities and Exchange Board of India) guidelines, these funds are mandated to invest at least 80% of their corpus in stocks of a particular theme. The performance of these funds depends on the performance of the respective sectors or investment themes.

III. Based On Tax Benefits

Equity-Linked Savings Scheme, also known as ELSS, is a tax-saving mutual fund scheme that invests at least 80% of its corpus in equity and equity-related securities. These tax-saver mutual funds offer the dual benefits of tax-saving as well as potential capital appreciation. Investments up to Rs.1.5 lakh in ELSS funds qualify for tax deduction under Section 80C of the Income Tax Act, 1961. You can save up to Rs46,800 (assuming the highest slab of income tax i.e. @30% plus health & education cess 4% excluding surcharge as applicable) by investing in ELSS mutual funds.

Conclusion

With so many types of equity funds available to individuals, investors at large can choose a scheme that suits their needs. Knowing the different types of equity funds can help you identify the objective of each fund. This, in turn, will enable you to hold relevant funds as per your risk profile.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.