Unlocking equity mutual funds: A comprehensive guide to types and benefits

Investing in equity mutual funds is an excellent opportunity for all investors looking for maximised returns along with reduced risks. There are so many mutual funds available in the market that cater to the needs of a wide range of investors. Among these, equity funds are the top choice of investors. In this article, we will look at the features of equity mutual funds, their various types as well as benefits to open up this investment avenue for all investors. 

What is equity mutual fund?

As the name suggests, equity mutual funds are shares that invest in the equity of several companies. The investments are spread over different companies from different sectors or that have a distinct market capitalisation to spread the risk. 

Equity funds provide relatively better returns than debt-based funds. However, since they heavily depend on the market conditions, they are also exposed to risks. These funds promise the highest returns in the mutual fund segment but come with a higher expense ratio. They serve the purpose of long-term investments.  

Types of equity mutual funds 

Let us now look at the different equity mutual funds types. They can be categorised based on the following measures: 

Investment Strategy-based Categorisation

• Thematic or Sectoral Funds

Certain equity mutual funds aim to follow a fixed theme such as an emerging market theme. Additionally, certain funds might focus on investing in a particular sector of the market such as pharmaceuticals, IT, etc. However, it is important to note that these mutual funds have a larger risk associated with them because of their narrow focus. 

• Focused Equity Fund

This fund aims to invest a maximum of 30 stocks at the market capitalisation determined at the time of the launch of the scheme. 

• Contra Equity Fund

These funds work based on a contrarian strategy where the fund managers identify underperforming stocks and purchase them with the aspiration of the prices increasing in the future. 

Market capitalisation-based Categorisation

• Large-cap funds

These funds invest about 80% of their funds in the equity shares of large-cap companies. As a result, they come with lower risks compared with other funds. 

• Mid-cap funds

These funds invest at least 65% of the total funds in the mid-cap companies that occupy a position between 100-250 in the market. These are relatively more volatile but offer good returns. 

• Small-cap funds

These funds likewise invest a 65% share of their funds in small-cap companies that occupy a position after the 150 companies as per the market capitalisation. 

• Multi cap funds

These funds invest 65% of their funds in the equity shares of large, mid and small-cap companies in varying ratios. The fund manager keeps rebalancing the portfolio according to the market performance to meet the required investment goals. 

Tax treatment-based categorisation

• Equity Linked Savings Scheme (ELSS)

This fund distinguishes itself based on the tax benefits of up to Rs. 1.5 lakh it provides under Section 80C of the Income Tax Act. They have a lock-in period of 3 years and invest 80% of the assets in equity-related funds. 

• Non-Tax Saving Equity Funds

Besides ELSS, all other equity mutual funds can be categorised as Non-Tax Saving Equity Funds. This means that tax on equity mutual funds applies to all other funds. 

Investment style-based categorisation

• Active funds

The active funds are actively managed by the fund managers who determine the stocks they wish to invest in. 

• Passive funds 

This fund works based on a particular scheme that determines all the stocks the fund should invest in. There is no active role of the fund manager in deciding the stocks for investment. 

Benefits of equity mutual funds 

Let us now look at the benefits accrued from investing in equity mutual funds. The core advantages include: 

1. Diversification

The prime benefit derived from investing in equity mutual funds is that it diversifies the investment. This means that the funds are divided and invested into the equity of different companies. 

As a result, in case one company does not perform well, the investor can still benefit from the investments in other companies. It helps lower the risk significantly. 

2. Better capital appreciation

The capital appreciation realised from investing in equity mutual funds is considerably greater when compared with investments in debt funds. 

If the prime goal of an investor is to get better capital appreciation, investing in equity mutual funds is the right choice. 

3. Tax saving 

Additionally, another benefit provided by equity mutual funds is tax saving with the ELSS schemes where investors can benefit from the tax-deductible amount of up to 1.5 lakhs per year. 

Compared with other investments that help save tax, the investment in ELSS comes with the shortest lock in 3 years. 

4. Long-term financial growth 

Equity mutual funds are the best investment choice for all investors aiming for long-term financial growth. The benefit of rupee cost averaging can also be accrued by investing through SIPs. 

The long-term goals are achieved in two ways, it gives you higher returns compared with other investments and also the risk is lowered with the long-term investment. 

Conclusion 

Equity mutual funds offer different types of investment opportunities to investors to help them pick a suitable fund based on their overall objectives. Whether they are aiming for good long-term returns, tax savings, small or large-cap funds, equity mutual funds have got it all. Additionally, investors can also benefit from fund diversification and better capital appreciation. To learn more, read blogs on StockGro.

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