Equity mutual funds invest a major part of its assets in equity and equity-related instruments like stocks of listed companies. They are usually associated with high risk and high returns. The investment objective of equity mutual funds is long-term capital growth. The equity mutual funds are categorized into the following 11 types:
- Large Cap Funds– Large-cap funds invest a minimum of 80% of total assets in equity and equity-related instruments of large-cap companies. Large-cap companies are the topmost 100 companies by market capitalization. They are more stable and well-established companies. Hence, the funds invested in these companies are less risky than Midcap and Small-cap funds. As their growth possibility is less, they give low returns. They are suitable for investors with an investment horizon of 5-7 years.
- Large and Mid-cap funds– These funds invest a minimum of 35% of total assets in stocks of large-cap companies and a minimum of 35% of total assets in stocks of mid-cap companies. So, a total of 70% of assets is allotted towards large and mid-cap stocks. And the remaining 30% of assets are invested as per the fund manager’s decision. They give more returns than large-cap funds and less returns than mid-cap funds. These are suitable for investors with a high-risk appetite than large-cap funds.
- Mid Cap Funds– Mid-cap funds invest a minimum of 65% of total assets in equity and equity-related instruments of mid-cap companies. Mid-cap companies are the top 101-250 companies by market capitalization. These companies are some of the fastest-growing companies. So, these funds give more returns than large-cap funds. They are suitable for investors with an investment horizon of 3-5 years.
- Small Cap Funds– Small-cap funds invest a minimum 65% of total assets in small companies which are 251st companies onwards by market capitalization. They have the potential to become mid-caps and large-caps in the future. These funds give you the opportunity to participate and get the benefits in their future growth. Therefore, the funds in this category have the highest risk and the highest returns. It is important to note that every company do not succeed in the long run. They are suitable for investors with an investment horizon of 7-10 years.
- Multi-Cap Funds– Multi cap funds have no restriction in size, and they invest across large-cap, mid-cap and small-cap stocks. Therefore, they have a diversified portfolio. They invest a minimum of 65% of total assets in equity and equity-related instruments. The fund manager has the freedom to change their portfolio composition as per the market conditions. S, they are better equipped to take advantage of emerging opportunities. They are riskier than large-cap funds and less risky than small-cap and mid-cap funds. Their returns are also more than large-cap funds but less than small-cap and mid-cap funds.
- Focused Funds– Focused funds invest a minimum of 65% of total assets in equity and equity-related instruments. But there is a limitation; the fund cannot keep more than 30 stocks in the portfolio. These are suitable for investors with high-risk appetite and at the same time, believe in the fund manager’s strategy.
- Sectoral/Thematic Funds– These funds invest a minimum of 80% of total assets in a particular sector/theme. A sectoral fund invests their money in a specific sector like infrastructure, automobiles, pharma etc. Similarly, a thematic fund invests in companies following a particular theme like MNC, Rural consumption, ESG, Consumption, Energy etc. These funds give you the opportunity to get the benefit from the growth of a specific sector/theme. As the funds invest in a specific sector/theme, any downturn in the sector/theme can lead to huge losses. Therefore, they are the high-risk funds, and you should only invest if you are optimistic about a particular sector/theme.
- ELSS Funds– ELSS stands for Equity Linked Savings Scheme. It is a close-ended fund having a lock-in period of 3 years. This fund helps you save tax and give you an opportunity to grow your money. It qualifies for income tax exemption under Section 80C of the Income Tax Act. These funds are similar to multi-cap funds, i.e. it can invest in large-cap, mid-cap and small-cap companies. Hence, their risks and returns are also identical to multi-cap funds.
- Dividend Yield Fund– Dividend Yield Fund invests predominantly in dividend-yielding stocks. The stocks which regularly give dividends to the investors are called dividend-yielding stocks. These funds invest a minimum of 65% of total assets in equity.
- Value Fund– These funds invest a minimum of 65% of total assets in equity and equity-related instruments. These funds follow a value investment strategy where the fund manager invests in stocks undervalued in price based on its fundamental characteristics. This strategy’s idea is that the markets have some inefficiencies, which causes some stocks to trade at levels below their actual worth. The fund managers are skilled enough to identify these inefficiencies.
- Contra Fund– These funds invest a minimum of 65% of total assets in equity and equity-related instruments. These funds follow a contrarian investment strategy where the fund manager focuses on investing against the prevailing market trend in assets that are performing poorly and selling them when they perform well. These strategies are far more complex than the value investment strategy.
Note: As per SEBI notification, a mutual fund is permitted to offer either a Value Fund or a Contra Fund but not both.
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