Equity mutual funds are funds that primarily invest in shares (stocks) of different companies. Hence, they are also called “Stock Funds”. The main characteristic of equity funds is that they are the riskiest type of mutual funds. Since the risk element is high, these funds provide more return when compared to other mutual funds. Equity funds are generally long term (we can get long term capital growth). Hence, it is also called ‘Growth Funds’
Equity mutual funds invest at least 60% of their assets in equity shares of numerous companies, while the remaining amount is invested into debt or money market instruments, based on the investment objective.
Types of Equity Funds
Equity funds may be broadly divided into the following types:
Based on Market Capitalization
- Large-Cap Funds: Equity funds where 80% of investment is in equity & equity related instruments blue-chip companies; having large market capitalization. The risk level is quite low; hence it is suitable for budding or aspiring investors.
- Mid-Cap Funds: In this fund, 65% of the investment is in equity & equity related instruments of mid cap companies. These funds are volatile but offer better returns than large-cap funds.
- Small-Cap Funds: Those equity funds having 65% investment in equity & equity related instruments of small cap companies. Highly volatile in nature but offer returns better than Large-Cap and Mid-Cap funds.
- Multi-Cap Funds: Equity funds investing in large-cap, small-cap, and mid-cap funds in a wavering proportion.
Based on Sector and Theme
- Sector Funds: Equity funds that invest in a specific sector such as FMCG, Banking, Pharmaceutical, etc.
- Thematic Funds: Equity funds that invest based on a particular theme such as international stocks, emerging business funds, etc.
Based on Investment Style
- Active Funds: Equity funds that are actively managed by fund managers is known as active funds. All the funds discussed above follow active investing style.
- Passive Funds: These are passively-managed funds that follow a particular index such as Sensex. Also known as ‘Index Funds’. For example, a Sensex index fund will invest in all Sensex companies in the same proportion in which the companies form part of the index.
Ways to Invest in Equity Funds
To invest in equity funds, an investor can adopt any of the following ways:
- Lump-Sum: In this option, the investor will pay the entire investment amount at one time.
- SIP (Systematic Investment Plan): In this option, the investor will invest a small amount of money at regular intervals for a specific duration.
Advantages / Benefits
Equity mutual funds are highly suitable for budding investors and market-savvy investors.
These funds provide a variety of advantages or benefits such as:
- Equity funds are cost-efficient. We can invest in equity funds with a nominal amount.
- Professional management is there in equity funds. Most of the funds are managed by an expert fund manager.
- We can also diversify our investment i.e. through investing in equity funds; an investor can invest in stocks of different companies in different sectors of the economy.
- Equity funds have high liquidity as the stocks are traded in major stock exchanges of the world, on a daily basis.
- Capital appreciation is there in equity funds. As the growth of the company increases, the market price of its stock also increases, eventually leading to capital appreciation.
- The investors can get regular income (dividends) when investing in blue-chip companies.
- The ELSS (Equity Linked Savings Scheme) offer tax benefits to the investors.
