Mutual Fund Investment: Types And Benefits Of Equity Mutual Fund Schemes!

There are many types of equity mutual funds and one such is 'Equity Fund' which predominantly invests in equity shares listed on the stock market. Equity funds have many perks and are suitable for mostly small individual investors or retail investors due to their diversification, and transparency, and not necessarily require a hefty capital for investment.

As per SEBI's guidelines, an equity mutual fund scheme must invest at least 65% of the scheme's assets in equities and equity-related instruments.

Notably, Equity funds are also categorized by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). These can be broad-market, regional or single-country funds. As per AMFI, the size of an equity fund is determined by market capitalization, while the investment style, reflected in the fund's stock holdings, is also used to categorize equity mutual funds.

Either be a particular market sector (technology, financial, pharmaceutical), a specific stock exchange (such as the BSE or NSE), foreign or domestic markets, income or growth stocks, high or low risk, or a specific interest group (political, religious, brand), there are equity funds of every type and characteristic available to match every risk profile and investment objective that investors may have.

The benefits of investing in equity mutual funds as per Ventura Securities are:

- Professional Management: Leave the stock picking and portfolio management to experienced professionals with proven track records.

- Diversification: Invest in a diverse basket of companies, mitigating risk by not putting all your eggs in one basket.

- Affordability: Start investing with small amounts, making it accessible to individuals with varying budgets.

- Liquidity: Easily buy and sell units through online platforms or investment advisors, offering flexibility.

- Compounding: The power of compounding allows your returns to snowball over time, potentially generating significant wealth in the long run.

As per AMFI, here are the types of equity funds.

Large Cap Equity Funds:

Here, investing a large portion of their corpus in companies with large market capitalization are called large-cap funds. This type of fund is known to offer stability and sustainable returns, over some time.

Large-cap companies are generally very stable and dominate their industry. Large-cap stocks tend to hold up better in recessions, but they also tend to underperform small-cap stocks when the economy emerges from a recession. Large-cap tend to be less volatile than mid-cap and small-cap stocks and are therefore considered less risky.

Mid-Cap Equity Funds:

In this scheme, investments can be made in stocks of mid-size companies, which are still considered developing companies. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Mid-cap stocks, however, tend to offer more growth potential than large-cap stocks.

Small Cap Funds:

The small-caps are stocks of smaller-sized companies. Small cap is a term used to classify companies with a relatively small market capitalization. However, the definition of small cap can vary among market intermediaries, but it is generally regarded as a company with a market capitalization of less than ₹ 100 crores. Many small caps are young companies with significant growth potential.

However, AMFI also pointed out that the risk of failure is greater with small-cap stocks than with large-cap and mid-cap stocks. As a result, small-cap stocks tend to be more volatile (and therefore riskier) than large-cap and mid-cap stocks. Historically, small-cap stocks have typically underperformed large-cap stocks during recessions but have outperformed large-cap stocks as the economy has emerged from recessions.

Multi-Cap Equity Funds or Diversified Equity Funds:

Here, investment is made in stocks of companies across the stock market regardless of size and sector. These funds provide the benefit of diversification by investing in companies spread across sectors and market capitalisation. They are generally meant for investors who seek exposure across the market and do not want to be restricted to any particular sector.

Thematic Equity Funds:

These funds invest in securities of specific sectors such as Information Technology, Banking, Service and pharma sector etc., which is specified in their scheme information documents. So, 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 per cent of its assets in equity and equity-related instruments. ELSS can be open-ended or close-ended. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of Rs 1.5 lakh.