Equity Mutual Funds should be a vehicle of choice when investing for long-term goals like — retirement, a child’s education, etc. There is a wide choice of equity investments before investors depending on the individual’s risk appetite. Equity funds are ideal for investors having a moderately high to high-risk appetite. So, let’s have a look to find if this investment suits you the best!

Equity funds are a type of mutual funds that invest mainly in stocks or equities. In other words, it is also known as a stock fund (another common name for equity). Equity represents ownership in firms — publicly or privately traded — and the aim of the stock ownership is to participate in the growth of the business over a period of time. Equity Funds can be actively or passively managed, depending on their objective.

Types of Equity Funds

1. Market Caps — Large cap Funds, Mid cap, and Small cap funds

Large cap stocks are commonly referred as blue chip stocks. Large cap mutual funds invest in those firms that have more possibility of showing year on year steady growth and high profits, which in turns also offers stability over a time. These stocks give steady returns over a long period of time. Large cap funds are considered to be safe, have good returns and are less volatile to the market fluctuations compared to other equity funds (mid and small cap funds).

Mid Cap Funds

Mid-cap funds invest in mid-sized companies. There are various definitions of mid-caps funds in the market, one could be companies with a market capitalization (MC= no of shares issued by the company X market price per share) of INR 500 Cr to INR 10,000 Cr. From a standpoint of the investor, the investing period of mid-cap funds should be much higher than large-caps due to the nature of the companies. 

Small Cap Fund

Small caps are typically defined as firms with a market capitalization (MC=no of shares issued by the company X market price per share) of less than INR 500 Crore. Their market capitalization is much lower than the large and mid-cap. Small cap firms have the potential to generate good returns. However, the risks involved in it are very high. But, if the investment period of a small cap is high, the risks tend to lower down.

2. Diversified Funds

Diversified funds invest across market capitalization, i.e., essentially across large-cap, mid-cap, and small-cap. They typically invest anywhere between 40–60% in large cap stocks, 10–40% in mid-cap stocks and about 10% in small-cap stocks. Sometimes, the exposure to small-caps may be very small or none at all. While diversified equity funds or multi-cap funds invest across market capitalizations the risks of equity still remain in the investment.

3. Sector & Thematic Funds

A sector fund is an equity scheme that invests in shares of companies that trade in a particular sector or industry like, for instance, a pharma fund would invest only in pharmaceutical companies. Since, sector mutual funds are less diversified their exposure to risk is comparatively high. The disadvantage around sector funds is the higher rate of volatility.

Thematic funds can be across a wider sector than just keep a very narrow focus, for example, media and entertainment. In this theme, the Fund can invest in various companies across publishing, online, media or broadcasting. The risks with thematic funds are the highest since there is virtually very little diversification.

4. Equity Linked Saving Schemes

These are equity mutual funds that save your tax as a qualified tax exemption under section 80C of the Income Tax Act. They offer the twin advantage of capital gains and tax benefits. ELSS schemes come with a lock-in period of three years. One can attain deductions up to INR 1,50,000 from their taxable income as per the section 80C of Income Tax Act.

5. Balanced Funds

Conventionally, balanced funds are investments that devote more than 65% of their assets in equities and the rest in debt instruments. The benefit of a balanced fund is that they provide equity returns with a lower risk factor. Balanced funds provide automatic portfolio balancing, which is highly beneficial when the markets are volatile. So when the markets are high, the fund manager automatically trades equities to maintain its maximum level and vice-versa.

6. International Mutual Funds

International Mutual Funds or global equity funds invest in offshore or foreign equity markets. These were introduced in India in 2009 with the aim to provide the Indian investor with avenues of international investing and diversification. Since that time onwards a number of such equity funds have come focused towards emerging markets (BRICs), developed markets (USA / Japan), and even specific countries. These are increasingly becoming popular in the context of diversification.

SIP the Best Way to Invest in Equity Funds

SIP is the most effective way of investing in equity funds. Also, systematic investing can prevent from the pitfalls of equity investments. A SIP is usually a monthly or a quarterly investment that happens automatically on a pre-decided date. Investors need to give a mandate to the fund company to deduct the investment from their bank account. SIPs are also a great tool to make investing become a habit!

Investors who believe in ‘high-risk, high-return’ investments should ideally invest in equity funds. Also, investing in these funds should always be considered as a long term investment.