Types of Equity Funds and their uses

Mere deciding that you want to have coffee won’t suffice. To be able to actually drink that beverage, you need to specify your type while placing your order. For example, you may want a large latte or you may be in the mood for a regular mocha. Likewise, just knowing that you want to invest in equity mutual funds won’t be enough. You must know the type specifically. There are several types of equity funds categorised according to investing strategies, styles, market capitalisation, and tax treatment. Let's find out about each of these, so you are able to pick the right ones for your financial goals. 

Mutual funds as per market capitalisation

Market capitalisation is the market value of a company's outstanding shares as per SEBI's (Securities and Exchange Board of India) classification. It is calculated by multiplying the total number of outstanding shares and the closing price of each share.  

Large cap mutual funds: These invest in the top 100 companies as per market capitalisation. They can provide stable returns as these companies are well-established with little scope for volatility. 

Mid cap mutual funds: These invest in medium-sized companies ranked from 101 to 250. Mid-cap funds are stable and can have immense growth potential. However, they may carry comparatively more risk than a large cap fund. 

Small cap funds: These invest in small-sized companies ranked from 251. They carry high risk as these companies are relatively small. However, they have the highest potential to grow.

Multi-cap funds: These invest across market capitalisation based on the prevailing market conditions.

Style-based mutual funds 

Sectoral funds: Sectoral funds invest the majority of their assets in a particular sector like consumer goods, insurance, etc. These are high-risk funds as all the money is invested in a single sector with minimal diversification.  

Thematic funds: Thematic funds concentrate on a particular theme. For instance, if the theme is healthcare, the fund could be investing in pharmaceutical stocks, insurance companies, etc. Just like sectoral funds, investing in mutual funds that follow a theme can also mean high risk.

Contra equity funds: These invest in poor-performing stocks that can be purchased at low costs with the expectation of growth in the long term. 

Tax-based mutual funds 

ELSS mutual funds: An Equity-Linked Savings Scheme is the only mutual fund that enjoys tax-saving benefits under Section 80C of the Income Tax Act, 1961.

ELSS funds have a lock-in period of 3 years and offer a tax deduction of up to Rs. 1.5 lakh per financial year.                  

Non-ELSS mutual funds: All other types of equity funds fall under the non-tax savings category. These funds do not qualify for tax deductions under Section 80C. 

Strategy based mutual funds

Value strategy: These invest in undervalued stocks that have the potential to grow soon. These are different from contra equity funds as they are not underperforming but just undervalued because their intrinsic value has not been recognised by investors yet. 

Growth strategy: These invest in stocks of companies that are already performing well in the market and are expected to grow more in the future to offer a better yield. 

Top-down strategy: These invest in companies based on more significant factors like economic, political or social events in the country. Based on these aspects, the fund manager focuses on a particular theme or sector and invests accordingly. 

Bottom-up strategy: These funds look at individual stocks and analyse factors like the management of the company or the performance of a particular company in a sector rather than the entire sector itself. 

Decided on which type to go with? You must know that alltypes of equity funds offer both – Systematic Investment Plans for regular investments as well as lump sum options.

Conclusion

Understanding the different types of equity funds can help you understand the risk involved and the potential for growth. It can, thus, help you choose suitable instruments for your future financial security.

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