What are equity mutual funds, why is it a better option for investment?

 

Equity mutual funds mostly invest their money in equities or stocks. A mutual fund scheme in India invests 65 per cent of its corpus in equities, Indian stocks, taxation and equity mutual fund related investments. This is the reason why even after putting money in the stock of international funds, they are not kept in the equity category.

 

What is an equity fund? Equity mutual funds try to get high returns by investing in shares of companies in all market capitalizations. Equity mutual funds are the riskiest part of mutual funds, and therefore, they have the potential to generate higher returns than debt and hybrid funds. The performance of the company plays a very important role in determining the returns of investors.

 

How do equity funds work? Equity mutual funds invest at least 60% of their assets in equity shares of many companies. Asset allocation in equity funds will be in line with the investment objective. Asset allocation can be made purely in shares of large-cap, mid-cap or small-cap companies, depending on market conditions. Investment style can be value-oriented or growth-oriented.

 

After allocating a significant portion towards the equity segment, the balance can go to debt and money market instruments. This is done to take care of sudden redemption requests as well as bring down the level of risk to some extent. The fund manager makes the decision to sell or buy or buy to take advantage of the changing market movements and to achieve maximum returns.

 

According to the rules of the Securities and Exchange Board of India, equity mutual funds in the country are divided into ten categories, which are as follows.

 

1. Multi-cap equity fund: As the name suggests, multi-cap equity funds are schemes that invest in all types of sectors. This includes large-cap, midcap, smallcap and all types of sectors.

 

2. Large-cap equity fund: This fund invests 80% of its corpus in large-cap companies, which is essential for the fund. Largecap funds invest in the top 100 companies in the country based on market capitalization.

 

3. Large and Midcap Equity Fund: Under this scheme, it is necessary to invest 35 per cent of its assets in large-cap companies and 35 per cent in midcap companies.

 

4. Midcap Equity Fund: These funds invest 65% of their assets in midcap stocks. Midcap companies are those that rank between 101–250 based on market capitalization.

 

5. Smallcap Equity Fund: These funds invest 65% of their assets or assets in smallcap companies like their name. Smallcap companies include those that fall below the 251 ranks based on market capitalization.

 

6. Dividend yield fund: Such funds are required to invest 65% of their assets in dividend yield stocks.

 

7. Value Equity Fund: These fund schemes invest 65 per cent of their assets in stocks that are based on the principles of value investing.

 

8. Contra equity fund: Such funds follow an opposite investment strategy and invest 65% of their assets based on the same strategy.

 

9. Focused equity fund: These funds invest in a portfolio of at most 30 stocks. Most of the focused funds follow the multi-cap strategy.

 

10. Sectoral and thematic funds: Such funds invest 80 per cent of their assets or assets in a particular sector and theme.

 

11. Equity Linked Savings Scheme Fund (ELSS): A three-year lock-in period is required if you want to invest in equity-linked savings schemes and tax-saving mutual funds. Such investment provides tax exemption up to Rs 1.5 lakh under Section 80C of the Income Tax Act.