Equity Mutual Funds- Meaning and Its Types

If you’re looking to invest in India’s booming stock market, equity mutual funds could be the perfect solution. These professionally managed funds pool together investments from multiple individuals and invest them in stocks. In this article, we’ll explain what equity mutual funds are and why they could be a wise investment choice for you.

What is Equity Mutual Fund?

Equity mutual funds are a type of mutual fund that invests primarily in stocks. They are professionally managed funds that pool money from multiple investors to purchase a diversified portfolio of stocks. Equity funds’ main objective is to provide investors with capital appreciation by investing in high-growth stocks. They are considered a high-risk, high-return investment options and are suitable for investors with a long-term investment horizon. 

There are different types of equity mutual funds available in the market, such as large-cap funds, mid-cap funds, small-cap funds, and sector-specific funds, among others.

Types of Equity Funds

There are more than one equity mutual fund types:

  •  Based on Investment Strategy

1.     Theme and Sectoral Funds– These funds may invest in specific industries such as IT, banking, or pharmaceuticals, or they may focus on themes such as investments in new markets, investing in foreign markets, and so on.

2.     Focused Equity Fund– With a 30-stock maximum, these funds invest in a restricted pool of carefully chosen stocks.

3.     Contra Equity Fund– These funds employ a contrarian strategy to investing, focusing on strong stocks that are now cheap with the expectation that they will outperform in the long run.

  • Based on Investment Style

1.     Active Fund – The fund manager searches for suitable stocks to invest in. He analyses firms, conducts research on them, and evaluates their performance. 

2. Passive Fund – The fund manager constructs a portfolio that resembles the Nifty Fifty or Sensex. 

  •  Based on Tax Treatment 

1.     Equity Linked Savings Scheme (ELSS) – These are plans that resemble mutual funds but where at least 80% of the investments are made in securities that are related to equities and equity-like securities. Their main benefit is the section 80C tax deduction of up to Rs. 1,50,000 available for investments made in ELSS.

2.     Non-Tax Saving Equity Funds – All equity funds, with the exception of ELSS, are non-tax saving plans, meaning there isn’t a specific clause that qualifies for an income tax deduction under the terms of the IT Act.

  •  Based on Market Capitalization

1.     Large-Cap Funds – Most of the fund’s investments are made in large-cap enterprises or businesses with a market value of at least Rs. 20,000 crores. When compared to mid-cap or small-cap-oriented funds, these funds are less volatile.

2.     Mid-Cap Funds – These funds focus on mid-cap firms, which typically have a market value of between Rs. 5000 crores and Rs. 20,000 crores. Mid-cap funds typically have higher volatility despite higher returns than large-cap funds.

3.     Small-Cap Funds – The majority of the assets in these funds are invested in companies having a market value of less than Rs. 5000 crores. This category includes most of the listed companies on the Indian stock markets.

4.     Multi-Cap Funds– These funds keep a healthy mix of the three equity types mentioned above to reduce risk. 

Bottom Line

Equity mutual fund schemes aggregate your funds and invest in equity stocks after a thorough investigation. Understanding the fundamentals of how equity funds operate is crucial. This involves knowing the equity fund’s purpose and how it relates to your risk tolerance. To invest in the best equity mutual funds in India, always research before investing. Tip- You can try Shoonya and invest in mutual funds, stocks, and bonds using more than 100+ technical indicators and advanced tools to supplement your investment choice and journey!