Equity mutual funds are a popular investment option for investors looking to grow their wealth in the long run. Equity funds are mutual funds that invest primarily in stocks of companies listed on the stock market.
These funds are categorised based on the size of the companies they invest in, their investment philosophy, and the level of risk they carry. Here are the different categories of equity mutual funds:
- Large Cap Equity Funds: As the name suggests, large-cap equity funds invest in companies with a large market capitalization. These companies are typically stable and dominant in their respective industries. These funds allocate up to 80% of funds in the large-cap stocks. Large-cap stocks tend to be less volatile than mid-cap and small-cap stocks and, therefore, considered less risky. Large-cap funds offer stability and sustainable returns over a period of time.
Did you know?
SEBI defines a large-cap as those listed companies which are ranked from 1st to 100th in the Indian stock exchanges in the terms of market capitalization.
- Mid-Cap Equity Funds: Mid-Cap funds involve companies which are ranked from 101-250 in terms of market capitalisation on the stock exchange. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. These funds have at least 65% of investment in mid-cap stocks. Mid-cap equity funds are suitable for investors willing to take a slightly higher risk in pursuit of higher returns.
- Small-Cap Equity Funds: Small-Cap equity funds invest in stocks of smaller-sized companies. These companies start from 251 rank on stock exchanges in terms of market capitalisation. These funds invest a minimum 65% of total assets in small cap stocks. Small-cap stocks are generally more volatile than large-cap and mid-cap stocks and, therefore, considered riskier.
- Multi-Cap Equity Funds: Multi-cap equity funds invest in stocks of companies across the stock market regardless of size and sector. The multi-cap fund invests a minimum 65% of total investments in equity & equity-related instruments. They are suitable for investors who seek exposure across the market and do not want to be restricted to any particular sector.
- Thematic Equity Funds: Thematic equity funds invest in securities of specific sectors or themes such as Information Technology, Banking, Services, Pharma, Infrastructure etc. These funds have a minimum 80% investment in stocks of a particular sector/ theme. The performance of these schemes depends on the performance of the respective sector. These funds may give higher returns, but they also come with increased risks.
- Equity Linked Savings Scheme (ELSS): Equity-Linked Savings Scheme (ELSS) is an equity mutual fund investment that invests at least 80% of its assets in equity and equity-related instruments. ELSS can be open-ended or close-ended. Investments in an ELSS scheme qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of ₹1.5 lakhs. The ELSS investments, however, have a three-year lock-in term during which one cannot withdraw the money.
In conclusion, equity mutual funds offer investors a range of options to suit their investment goals, risk appetite, and tax planning needs. Evaluating your investment objectives and risk tolerance before choosing a fund that aligns with your investment goals is important.