Equity Mutual Funds

We introduced various types of mutual funds in chapter 3. It is time to take a look at them in detail. 

What are Equity Mutual Funds?

As the name suggests, equity mutual funds are those which primarily invest in stocks. The fund manager selects a portfolio of stocks as per the fund’s ideology. The NAV moves as per the rise and fall of the price of these shares. 

We introduced various types of mutual funds in chapter 3. It is time to take a look at them in detail. 

What are Equity Mutual Funds?

As the name suggests, equity mutual funds are those which primarily invest in stocks. The fund manager selects a portfolio of stocks as per the fund’s ideology. The NAV moves as per the rise and fall of the price of these shares. 

Every mutual fund has an investment objective such as large-cap, small-cap, mid-cap, multi-cap, banking sector, pharma sector, etc. The asset is allocated as per this investment objective. 

However, it is important to note that 100% of any mutual fund scheme is never invested in the equity market. A certain percentage is always allocated in debt and money market instruments to bring stability to the funds. However, this allocation ratio may vary from one scheme to another. 

Please note: Among all the kinds of mutual funds, equity mutual funds contain the highest amount of risk. However, they also have the potential to generate the highest returns. 

Who is it ideal for?

The decision to invest in equity mutual funds should be taken as per one’s risk profile, investment horizon, and other factors. For example, if you plan to stay invested for the long-term (5-years or more) and have a higher risk appetite, equity mutual funds may be the right option for you. 

Different Types of Equity Funds: 

Equity Funds can be categorized based on a variety of parameters:

◉ Based on investment style

1. Active Equity Funds – The fund manager actively chooses stocks based on his research, and realigns the portfolio at regular intervals for example, Axis Bluechip Fund, SBI Bluechip Fund, etc. 

2. Passive Equity Funds – The fund manager creates a portfolio that mirrors a particular index (e.g.: Sensex, Nifty 50) and does not realign the portfolio unless needed. ICICI Prudential Nifty Index Growth or UTI Nifty Index Fund are examples of passive equity funds. 

Active funds are more proactively managed and hence have the potential to produce higher returns. Passive funds, however, have relatively lesser risk, and ideally, the return should be similar to that of the index they are mirroring. 

◉ Based on market capitalization

1. Large-cap funds – These funds invest at least 80% of their AUM in large, well-established companies and thus offer stable returns with relatively lesser risk. 

2. Mid-cap funds – These funds invest at least 65% of their AUM in medium-sized companies. 

3. Small-cap funds – These funds invest at least 65% of their AUM in small-sized companies. 

Please note: Large-cap funds have a relatively lesser risk profile among these three types of funds and offer stable returns. However, they may offer slower growth. On the other hand, Mid-cap and small-cap funds invest in companies that have growth potential and can offer higher returns. But they contain higher risk too. 

Some funds may choose to invest in more than one category so as to offer investors the option of stability and growth. For example, SBI Large & Midcap Fund, Tata Large & Midcap Fund, etc. 

4. Multi-cap funds – Multi-cap funds can invest in companies of all sizes. However, they need to invest at least 25% each in large, mid, and small-cap stocks. 

5. Flexi-cap funds – These funds were introduced recently and have the flexibility of investing in companies of any market capitalization, but unlike multi-cap funds, these funds do not need to invest any minimum amount mandatorily in companies of certain market capitalization. 

Benefits of Equity Funds: 

Every mutual fund has an investment objective such as large-cap, small-cap, mid-cap, multi-cap, banking sector, pharma sector, etc. The asset is allocated as per this investment objective. 

However, it is important to note that 100% of any mutual fund scheme is never invested in the equity market. A certain percentage is always allocated in debt and money market instruments to bring stability to the funds. However, this allocation ratio may vary from one scheme to another. 

Please note: Among all the kinds of mutual funds, equity mutual funds contain the highest amount of risk. However, they also have the potential to generate the highest returns. 

Who is it ideal for?

The decision to invest in equity mutual funds should be taken as per one’s risk profile, investment horizon, and other factors. For example, if you plan to stay invested for the long-term (5-years or more) and have a higher risk appetite, equity mutual funds may be the right option for you. 

Different Types of Equity Funds: 

Equity Funds can be categorized based on a variety of parameters:

◉ Based on investment style

1. Active Equity Funds – The fund manager actively chooses stocks based on his research, and realigns the portfolio at regular intervals for example, Axis Bluechip Fund, SBI Bluechip Fund, etc. 

2. Passive Equity Funds – The fund manager creates a portfolio that mirrors a particular index (e.g.: Sensex, Nifty 50) and does not realign the portfolio unless needed. ICICI Prudential Nifty Index Growth or UTI Nifty Index Fund are examples of passive equity funds. 

Active funds are more proactively managed and hence have the potential to produce higher returns. Passive funds, however, have relatively lesser risk, and ideally, the return should be similar to that of the index they are mirroring. 

◉ Based on market capitalization

1. Large-cap funds – These funds invest at least 80% of their AUM in large, well-established companies and thus offer stable returns with relatively lesser risk. 

2. Mid-cap funds – These funds invest at least 65% of their AUM in medium-sized companies. 

3. Small-cap funds – These funds invest at least 65% of their AUM in small-sized companies. 

Please note: Large-cap funds have a relatively lesser risk profile among these three types of funds and offer stable returns. However, they may offer slower growth. On the other hand, Mid-cap and small-cap funds invest in companies that have growth potential and can offer higher returns. But they contain higher risk too. 

Some funds may choose to invest in more than one category so as to offer investors the option of stability and growth. For example, SBI Large & Midcap Fund, Tata Large & Midcap Fund, etc. 

4. Multi-cap funds – Multi-cap funds can invest in companies of all sizes. However, they need to invest at least 25% each in large, mid, and small-cap stocks. 

5. Flexi-cap funds – These funds were introduced recently and have the flexibility of investing in companies of any market capitalization, but unlike multi-cap funds, these funds do not need to invest any minimum amount mandatorily in companies of certain market capitalization. 

Benefits of Equity Funds: