Primer _ Equity Mutual Funds

Here’s a ready reckoner on Equity Funds.

What exactly are Equity Mutual Funds?

A Mutual Fund that

• Primarily invests in equities i.e. shares of different companies and equity-related instruments (if the fund invests more than 65% of its total assets in the equity shares of different companies.)
• The objective is long-term growth (Capital appreciation) but the scheme returns could be volatile in the short term.
• Suitable for investors with higher risk appetite and longer investment horizon.
• Equity funds may focus on certain sectors of the market or may have a specific investment style, such as investing in value or growth stocks.

 Types of Equity Mutual Funds

There are various ways of categorising equity funds. Here is a look at the different categories.

Categorised based on Market Capitalisation

Some schemes might decide to invest in companies with specific market capitalisations (total value of the shares of a company). Here are the common types:

For this we need to recpitulate, Market Capitalisation is total number of shares of a company multiplied by its Market price.

• Large-Cap funds – typically invest a minimum of 80% of their total assets in equity shares of large-cap companies (the top 100). These schemes are considered to be more stable than the mid-cap or small-cap focused funds.
• Mid-Cap Funds – usually invest around 65% of their total assets in equity shares of mid-cap companies (101-250th placed companies according to market capitalisation). These schemes tend to offer better returns than the large-cap schemes but are also more volatile than them.
• Small-Cap Funds – typically invest around 65% of their total assets in equity shares of small-cap companies (251st and below placed companies according to market capitalisation). This is a huge list and more than 95% of all companies in India fall into this category. These schemes tend to offer great returns than the large-cap and mid-cap schemes but are also highly volatile.
• Multi-Cap Funds – usually invest around 65% of their total assets in equity shares of large-cap, mid-cap and small-cap companies in varying proportions. In these schemes, the fund manager keeps rebalancing the. portfolio to match the market and economic conditions keeping in mind the investment objective of the scheme.
• Large and Mid-Cap Funds – which usually invest around 35% of their total assets in equity shares of mid-cap companies and 35% in large-cap companies. These schemes offer a great blend of lower volatility and better returns.
• Flexi Cap Funds – which typically invests at least 65% in equity/equity-related instruments. Flexi Cap funds invest in companies of all sizes and across sectors. This flexibility allows them to make changes in the portfolio as market conditions change.

Categorised according to Investment

• Thematic or Sectoral Funds – An equity fund might decide to follow a specific investment theme like investing in a particular sector of the market like IT, Pharmaceutical, commodities, Finance, FMCG etc. It is important to note that sector or theme-based funds carry a higher risk since they focus on a specific sector or theme.
• Contra Equity Fund – As the name suggests, these schemes follow a contrarian strategy of investing. These schemes analyse the market to find underperforming stocks and purchase them at low prices under the assumption that these stocks will recover in the long term.

Categories based on Tax Treatment

• Equity Linked Savings Scheme (ELSS) – ELSS is the only equity scheme that offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These schemes invest a minimum of 80% of its total assets in equity and equity-related instruments. Further, these schemes have a lock-in period of 3 years.
• Non-Tax Saving Equity Funds – Except ELSS, all other Equity Funds are non-tax saving schemes. This means that the returns are subject to capital gains tax.

Categories based on Investment Style

• Active Funds – These schemes are actively managed by the fund managers who handpick the stocks that they want to invest in.
• Passive Funds – These schemes usually track a market index or segment which determines the list of stock that the scheme will invest in. In these schemes, the fund manager has no active role in the selection of the stocks.

 What are Hybrid funds?

Hybrid funds Invest in a mix of equities and debt securities, thereby trying to find a ‘balance’ between growth and income by investing in both equity and debt.

– The regular income earned from the debt instruments provide greater stability to the returns from such funds.

– The proportion of equity and debt that will be held in the portfolio is indicated in the Scheme Information Document

– Equity-oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for growth in their investment with some stability.

– Debt-oriented hybrid funds (Conservative Hybrid-Fund) are suitable for conservative investors looking for a boost in returns with a small exposure to equity and a higher allocation to debt.

– The risk and return of the fund will depend upon the equity exposure taken by the portfolio – Higher the allocation to equity, greater is the risk.

To understand the tax treatment of equity-oriented mutual funds click here.

So go ahead and place your first step ahead in starting your investment journey in equity funds without any delay!!