What are Equity mutual funds? All you need to know
Equity mutual funds are investment instruments that primarily invest in stocks of various companies across different sectors.
The aim of the fund manager is to maximize returns by allocating money among stocks with the help of screening criteria such as market capitalization or by investing in stocks of varying sectors.
Equity mutual funds are the riskiest category of mutual funds because of the high exposure (at least 65%, according to the rules laid down by the Security and Exchange Board of India) to equity markets.
However, this also leads to higher returns (on average) than other classes of mutual funds.
The risk involved in this investment arises from the general market conditions and the specific sectoral performance. A good option for investors looking to grow their capital over the long term, with considerable exposure to the stock market, is an Equity mutual fund.
Investment in these funds is possible through the SIP (Systematic Investment Plan) format and lump-sum format. Investors with different objectives and risk profiles have other options (among equity mutual funds) to invest in.
Difference between Equity and Equity mutual funds
Direct investment into equity means purchasing stocks of listed companies directly through your Demat account.
In contrast, when you purchase an equity mutual fund, you are giving your money to the fund manager managing that fund to invest primarily in equity and some investment in other instruments to balance the fund.
While investing directly in equity, you have to decide which company to invest in and other related decisions. When you invest in equity funds, you choose to choose the fund, and the fund manager takes care of the further details, like the fund will constitute what companies’ shares, in what ratio, etc.
Also, mutual funds offer diversification by giving us the option to make investments in diverse companies and sectors through an equity mutual fund, thereby exposing us to a more significant section of the market and possibly reducing our risk.
Investment in these funds is possible through the SIP (Systematic Investment Plan) and lump-sum formats. Investors with different objectives and risk profiles have other options (among equity mutual funds) to invest in.
These are the main difference between direct equity and equity mutual funds investment
Different types of equity mutual funds
1. Categorization based on the market capitalization of companies
- Large-cap funds,
- Mid-cap funds,
- Small-cap funds, and Multi-cap funds.
Market capitalization tells us about the company’s size; it is calculated as follows:
Market Cap = Price of share * No. of shares outstanding
Companies having a market cap of more than Rs. 20,000 crores are known as large-cap companies. A mid-cap company has a market capitalization between Rs. 5,000 and Rs. 20,000 crores, and small-cap companies have a market capitalization of less than Rs. 5,000 crores.
2) Sector funds
These types of equity mutual funds invest the majority amount in particular sectors; that is, there is a concentration of investment into specific sectors in the economy, like FMCG, pharma, technology, PSUs (Public sector undertakings), etc.
3) Theme-based funds
Theme-based equity mutual funds are pretty similar to sectoral funds because they invest in “themes” like ESG (Environmental, Social, Governance), Make in India, Digital India, and many other themes in the public and private sector.
4) Focused funds
Investments via these funds mean that more than 65% of investments are in equity only and related investments.
5) Contra funds
Just as the name says, contra equity mutual funds follow contrarian investing methods – identifying potential market winners and investing in them.
6) Taxability-based categorization
ELSS (Equity linked savings scheme) funds allow for deductions under section 80C of the Income Tax Act.
How do equity mutual funds work?
Equity mutual funds work simply. To state it in words, equity mutual funds invest more than 60-65% of their assets in stocks of different companies.
The fund manager tends to invest in names to maximize the overall return from the fund.
Are equity funds the same as mutual funds?
Equity funds are a type of mutual fund that primarily invests in equity shares of companies.