Types of Equity Mutual Funds
In this article
1) Types of Equity Mutual Funds
2) Benefits of Equity Mutual Funds
There are various types of equity mutual funds based on:
Based on Management Style:
Equity Mutual Funds can either be actively managed funds or passively managed funds.
- In an actively managed fund, the fund manager plays an active role in stock selection and engages in constant buying and selling of securities to deliver high returns. The mandate of an actively managed equity mutual fund is to beat its benchmark and generate superior alpha.
- A passively managed mutual fund, on the other hand, does not strive to beat its benchmark but simply mirrors it. The composition of a passively managed mutual fund is a replica of its benchmark. The fund manager plays no active role in stock selection or scheme management.
This is precisely why passively managed mutual funds have lower expense ratio compared to actively managed mutual funds. Index Funds are a common type of passively managed fund. But when it comes to generating alpha over market indices then actively managed funds generally stand superior.
Based on Market Capitalisation:
Market capitalisation refers to the total value of a company’s shares. Market capitalisation helps investors gauge the overall size and dominance of a company. As per SEBI, market capitalisation can be divided as:
1st 100 companies – Large Cap
101st to 250th companies – Mid Cap
251st companies onwards – Small Cap
So, based on market capitalisation, equity mutual funds can be broadly classified as:
- Large-Cap Equity Funds: Large-cap equity funds invest in the 1st 100 companies, with the highest market capitalisation, deemed to be ‘bluechip’ and hence offer stable returns. Large Cap funds must invest a minimum of 80% of their corpus in equities of ‘bluechip’ companies. The risk profile of large-cap funds is usually ‘low’.
- Large & Midcap Equity Funds: Large & Midcap Equity Fund invest in both the blue-chip and mid-cap stocks. Off their total investment corpus minimum 35% should be in bluechip stocks and another 35% in mid-cap stocks. The risk profile of large & midcap funds is ‘average – High’.
- Mid Cap Equity Funds: Mid Cap Equity funds invest in the 101st – 250th companies and are riskier compared to large-cap funds. They also have the potential to deliver superior returns compared to blue-chip funds. Mid Cap Funds must invest a minimum 65% of their corpus in mid-cap stocks. The risk profile of mid-cap funds is usually ‘high’.
- Small Cap Equity Funds: Small Cap Equity Funds invest in stocks with low market capitalisation and carry high risk. Small cap Funds must invest a minimum of 65% of their corpus in small-cap companies. Small cap funds are suitable only for high-risk investors with a long term time horizon.
- Multi cap Equity Funds: Multi-cap Equity Funds invest across market capitalisation and primarily in a mix of large-cap, mid-cap and small-cap stocks. According to SEBI guidelines, equity allocation should be increased to 75% and maintain 25% allocation in large cap, mid-cap and small-cap respectively.
Based on Sectors and Themes:
- Sector Funds: These funds focus only on one area of the market or a sector and hence invest only in one sector. For example, the finance sector or infrastructure sector.
- Thematic Funds: These funds invest in a theme-based idea. For example, if you believe that an infrastructure sector might do well then you will invest in companies that are related to it like cement, steel, power, etc.
These funds are suitable only for highly aggressive investors with a super long time horizon.
Based on Redemption:
Equity mutual funds can be categorised on the basis of redemption - Closed Ended Schemes and Open Ended Schemes
- Close Ended Schemes: Investors can invest in close-ended equity mutual funds only during the NFO open period. Close ended equity mutual funds have a fixed maturity date, before which investors cannot redeem their holdings. While close ended mutual funds are listed on the stock exchange, they have very low liquidity.
- Open Ended Schemes: In this scheme, an investor can buy and sell units anytime throughout the year. There is no restriction on the entry and the exit. These funds offer highest liquidity as they can be redeemed as per the daily NAV.
Based on Investment Style
There are 3 types of equity funds based on the investment style. These are:
- Growth Funds: Growth funds contain stocks of those companies which are expected to grow faster than the market average. These funds can help investors to attain maximum capital appreciation.
- Value Funds: Value funds follow the value investing strategy and are those funds which have great potential but are undervalued. This valuation is evaluated on the basis of fundamental analysis.
- Contra Funds: Contra funds are based on ‘against-the-wind’ type of investment style or in simpler terms, not to follow the herd mentality. These funds may not be performing well at that particular point of time but in future are expected to perform fairly well enough.
Benefits of Equity Mutual Funds
The benefits offered by equity mutual funds are as follows:
- Expert management: Equity funds are monitored by experts with an immense knowledge of mutual funds. These expert fund managers know every aspect of mutual funds and hence can help you in your wealth creation journey.
- Tax benefit: ELSS (Equity Linked Savings Scheme - type of equity fund) as per the Section 80C of the IT (Income Tax) Act, 1961,offers tax benefit of up to ₹ 46,800/- by investing ₹ 1,50,000/-
- Diversification: This reduces the risk exposure of equity funds due to the widespread of your investments across stocks of various companies. One can also diversify in the various types of mutual funds mentioned above.
- High returns potential: Since equity investing majorly invests in stocks, they have high returns potential that can outpace the market average.
- Convenience: One can invest in one-go with lump sum investment mode or like an instalment with SIP investment mode.
- Liquidity: The redeemed amount from equity funds are credited to your bank account in three days due to which equity funds offer high liquidity.
- Affordable: One can start investing with amount as little as ₹ 500/- in equity mutual funds by starting their SIP at a predefined time interval.
Open a free mutual fund investment account with India’s best mutual fund distribution platform & get started with your investment in equity funds today.
1st 100 companies - Large cap funds
101 - 250th companies - Mid cap funds
251st onwards - Small cap funds