Types Of Equity Mutual Funds An Investor Must Know About

If you’ve ever wondered what is equity mutual fund , it’s a scheme that invests at least 65% of its assets in shares or equity-related instruments. The main aim of these funds is capital appreciation over the long term, which makes them popular among wealth-building investors. Unlike debt schemes, equity funds carry higher risk but also greater return potential, leading many to compare equity vs debt mutual funds before investing.

There are various types of equity mutual funds classified by company size, sector, or investment strategy. For example, large-cap mutual funds provide relative stability through established companies, while small-cap mutual funds offer high-growth opportunities with added risk. Mid-caps and flexible strategies like flexi-cap mutual funds allow investors to balance safety with growth. Overall, equity funds remain one of the most attractive types of mutual fund schemes for long-term financial goals.

Knowing the different types of equity mutual funds according to market capitalisation is essential when making an investment choice. Each category has a unique risk-return profile, and market capitalisation indicates the size of the businesses in which your money is invested. Let’s examine the primary categories:

Large-cap Funds

The top 100 firms by market capitalisation are the investments made by large-cap mutual funds. These businesses have solid business plans and a track record of success, making them leaders in their respective industries. Large-cap mutual funds are a suitable option for novices because they are relatively less volatile than mid-cap or small-cap mutual funds. This category is frequently preferred by investors seeking steady long-term capital building. Large-caps are well-liked equity mutual funds in India, striking a mix between relative safety and growth.

Mid-cap Funds

Companies with market capitalisations between ₹5,000 crore to ₹20,000 crore are the focus of mid-cap mutual funds. These companies are riskier than large-caps, but they have more room to develop. Mid-cap stocks may see more severe drops during downturns, but they frequently outperform in bull markets. In terms of risk and return, they act as a link between large-cap mutual funds and small-cap mutual funds. Mid-cap stocks appeal to investors with a long time horizon and a moderate risk tolerance.

Small-cap Funds

Small-cap mutual funds make investments in businesses with market capitalisations less than ₹5,000 crore. These companies are typically start-ups with significant growth potential but high levels of volatility. During market rises, small-cap stocks can yield outstanding profits, but they are also susceptible to changes in the economy. In this category, SIPs are advised to lower timing risks. Small-cap mutual funds are riskier than large-cap funds, but they also have a better potential to generate wealth for long-term investors.

 Flexi-cap Funds

Flexi-cap mutual funds are flexible investment plans that make investments in small, mid-sized, and large-sized firms. Fund managers are free to change allocations in response to changes in the market. Compared to multi-cap mutual funds, which have a set minimum allocation to each category, they are therefore less restricted. Investors looking for a balance between stability and growth can benefit from flexi-caps. Many of the top flexi-cap mutual funds in India have actively changed allocations to provide competitive returns.

Multi-cap Funds

Although there are required allocations to each category, multi-cap mutual funds also invest in large-, mid-, and small-cap companies. They have to put at least 25% of their money into large-, mid-, and small-cap stocks, each as per SEBI requirements. Diversification is guaranteed, but the flexibility that flexi-cap mutual funds offer is taken away. Multi-caps are frequently preferred by investors who seek disciplined exposure to all market segments. For individuals seeking development prospects while preserving equilibrium among capitalisation levels, they are suitable.

Understanding the many types of equity mutual funds that are available and how they fit with your financial objectives is crucial when investing. Whether sector-specific, growth-orientated, or tax-saving, each category offers a different strategy for generating wealth in the long run. Here is a thorough examination of the main categories.

Thematic and Sectoral Equity Funds

Because they invest in businesses that support a particular concept, sector, or economic subject, sectoral mutual funds and thematic mutual funds are special. These funds focus investments in a single sector, as opposed to diversified equity mutual funds, which distribute risk across multiple sectors. An IT sector mutual fund, for instance, would concentrate on software and tech firms, whereas a pharma sector mutual fund might make investments in hospital networks, biotechnology, and healthcare.

 The main benefit of sector and theme funds is their ability to produce larger returns potential in the event that the selected sector or subject does well. For example, a thematic mutual fund with a healthcare focus might yield potentially better returns when demand for medications and medical facilities is increasing.

ELSS (Equity Linked Savings Scheme)

ELSS mutual funds are unique among all types of mutual fund schemes since they mix equity growth and tax savings. They are well-liked by salaried investors since they are eligible for deductions under Section 80C of the Income Tax Act, 1961. Despite being shorter than many conventional tax-saving options, the 3-year lock-in guarantees disciplined investing. 

Returns from ELSS’s primary investments in diversified equity mutual funds are correlated with the market, although they are frequently alluring over the long haul. Because of this, ELSS is a dual-purpose fund that is perfect for both tax burden reduction and wealth accumulation. ELSS is frequently the first choice for investors who are new to tax-efficient planning. 

Additionally, ELSS is economical for novices because it can be started with small SIP amounts. If investments are sustained over a number of years, the compounding effects are substantial.

Contra Funds

Contra funds invest in businesses that are undervalued or ignored, adopting a contrarian strategy. They seek out situations where there is long-term potential but low market sentiment, in contrast to conventional stock mutual funds. Since it could take years for these equities to recover, this approach calls for patience. Contra funds are riskier than large-cap mutual funds, and they require skilled fund managers to find hidden treasures. 

When markets are optimistic, they can perform poorly, but when valuations drop, they can yield significant gains. Suitable for those who can tolerate short-term volatility and seek a unique approach.

Value Funds

Value funds are intended for long-term growth and stability-seeking investors. They aim to provide a margin of safety by investing in businesses that are trading below their intrinsic value. Value funds rely on market declines to unlock potential gains, in contrast to growth-orientated mid-cap or small-cap mutual funds. These funds frequently concentrate on well-established companies with consistent profits but short-term undervaluation. Investors gain from relative stability and capital growth over time as the market realises its full potential. 

Goal-orientated investors who have the patience to wait out market cycles are suitable candidates for value funds.

Focused Funds

In contrast to diversified equity mutual funds, which spread risk broadly, focused funds limit their portfolio to 20-30 carefully chosen companies. This concentration implies larger potential rewards if stock selection is solid, but also higher risk if a few picks disappoint. To get the benefits, investors must hold their investments for at least 5-7 years to allow compounding. Focused funds are less flexible than flexicap mutual funds, but they are more conviction-driven. They are suited for investors who have a high risk tolerance and believe in the fund manager’s stock selection abilities. Focused funds can help achieve aggressive wealth-creation targets.

International Equity Funds

International equity funds allow Indian investors to diversify across global markets. Unlike equity mutual funds in India, these invest in companies and indices from developed or emerging markets. They enable access to industries and enterprises that are not available locally, as well as the benefit of currency appreciation. 

However, they come with additional risks, such as currency volatility and international market rules. International funds are suitable for long-term investors seeking global diversity. When paired with large-cap or flexi-cap mutual funds, they provide an additional layer of balance to portfolios.

• Equity mutual funds invest primarily in stocks, offering higher risk but greater potential returns compared to debt funds.
• Investors can choose from different categories like large-cap mutual funds, mid-cap mutual funds, small-cap mutual funds, flexi-cap mutual funds, and multi-cap, based on risk appetite.
• Goal-based options such as ELSS mutual funds, value, contra, and thematic funds help align investments with specific financial objectives.
• Understanding equity vs debt mutual funds is essential before deciding on the right mix for wealth creation.
• Overall, a good strategy is to match the types of equity mutual funds with long-term goals, investment horizon, and risk profile.