What Are Equity Mutual Funds?

Published by Sharekhan Education | April 11, 2021

What Are Equity Mutual Funds?

Mutual funds have been around for a long time but investing in mutual funds has gained greater momentum in the recent years especially equity mutual funds. These have found more takers now than ever before. So let us dive straight into understanding what these equity mutual funds are and who should be investing in them?

Equity mutual funds are one of the five main categories of mutual funds schemes as categorized by SEBI, the others being Debt, Hybrid, Solution Oriented and Other schemes. In this article we shall focus on equity mutual funds and its types.

So what are equity mutual funds?

Mutual funds that predominantly invest in equity and equity related instruments are known as equity mutual funds. Being equity oriented in nature these funds fall high on the risk ladder, are useful tools for long term wealth creation and are suitable for investors with a long term investment horizon and higher risk tolerance.

Equity funds are further categorized as follows:

1.Large Cap Funds:

These funds invest mainly in large sized and fundamentally strong companies across various sectors. These companies are the first 100 companies rankedin terms of full market capitalization. Large Cap Funds are generally suitable for investors looking for exposure in equity but at relatively lower risk.

2.Mid Cap Funds:

These funds invest in mid-sizedcompanies across sectors which are ranked from 101 to 250 in terms of full market capitalization. They are relatively riskier than the large cap funds and are generally suitable for investors with moderate risk appetite.

3.Large and Mid-cap funds:

These funds invest in both large and mid-sized companies; a minimum 35%of the portfolio each into large cap and mid cap companies. These funds are generallysuitable for investors who have moderate risk appetitesand are looking for slightly better returns than large cap funds.

4.Small cap Funds:

These funds invest in small companies across various sectors. These companies areranked 251 onwards in terms of full market capitalization. As the risk associated is very high these funds are generally suitable for investors with higher risk appetite.

5.Flexi Cap funds:

These diversified mutual funds invest across all market caps i.e. large, mid and small cap stocks. As the fund manager has flexibility to allocate portfolio across market caps; the portfolio varies from fund to fund so does the fund’s risk. For example some funds could be tilted towards large cap stocks while others may focus more on mid cap stocks. These funds are generally suitable for investors with moderate to high risk appetites.

6.Multi cap Funds:

Like flexi cap these funds also invest across market caps with the difference that they need to invest a minimum of 25% in each of the large cap, mid cap and small capstocks.  As these funds will have at least 50% of their portfolio invested in small & mid cap stocks; they are placed higher on the risk ladder and generally suitable for investors willing to take moderate to higher risk.

7.Dividend Yield Funds:

These predominantly invest in stocks which pay high dividends. These funds are generally suitable for investors looking for lower volatility.

8.Value Fund:

These funds follow value investment strategy meaning they invest in stocks which are trading lower than their intrinsic value.As these funds are risky; they are generally suitable for investors with higher risk profiles.

9.ContraFund:

These funds follow contrarian investment strategy; meaning buying and selling stocks opposite to the prevailing market sentiments.The risk level in these funds is also very high and so these funds are generally meant for investors willing to take higher risk.
A point to note here is that a Mutual Fund house can either offer a value fund or a contra fund, but not both.

10.Focused Funds:

These funds focus on limited number of stocks and can invest in a maximum of 30 stocks only. The fund will have todecide and declare market capitalization of thestocks in its portfolioat the launch of the scheme;i.e. whether it focuses on large cap, mid cap or small cap stocks.As these funds focus only on limited stocks; due to lesser diversification the risk is high and hence these funds are generally suitable for investors willing to take higher risk.

11.Sectoral/ Thematic Funds:

Sectoral funds primarily invest in a particular sector like banking, pharma etc. On the other hand Thematic funds follow a particular themee.g. If the theme is infrastructure; then they invest in companies which are relatedto infrastructure like steel, power, cement etc. Sectoral or thematic funds pose higher risk as they focus solely on a particular sector or theme, making them generally suitable for investors with higher risk profiles.

12. Equity Linked Savings Scheme (ELSS):

These funds come with a statutory lock in period of 3 years and provide tax benefits u/s 80 C. Since these funds are diversified across market capitalization with no mandated fixed percentage investment in large, mid or small cap stocks, the portfolio may vary from fund to fund. Investors thus need to check the portfolio and select a fund based on their risk appetite.

To wrap it up Equity mutual funds offer an opportunity to investors looking to invest in equity through the indirect route. As these funds differ in their investing style, portfolio constituents and inherent risks; you need to select funds which match your investing objectives, asset allocation, time horizon and risk profile.

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