Do you wish to expose your investment portfolio to equities? But, at the same time are you cagey about direct stock purchases? Then equity mutual funds might be the right investment option for you. This article aims to serve as an equity investment guide and everything you need to know about equity funds before you invest in them.

What is equity fund?

Equity mutual funds are a type of mutual funds that primarily invest in stocks of different companies in an attempt to generate significant returns. Also known as stock funds, equity funds are often linked as high-risk investment options when compared to other types of mutual funds.

Who should invest in equity funds?

Equity funds are ideal for those investors who are comfortable with high risk in an attempt to generate significant returns. When you invest in mutual funds, you must ensure that your investment portfolio is line with your financial objective, risk profile, and investment horizon. Equity investments follow the same principle as well. Generally, equity funds are ideal for those investors who have long-term financial goal with high risk appetite.

Types of equity funds

The primary investment objective of all types of equity funds is to create wealth and promote capital appreciation. However, all equity funds do not have the risk profile. Different types of equity funds categorisedon the basis of varying risk profile and investment objective are:

  1. Large-cap equity funds

As per SEBI’s (Securities and Exchange Board of India), large-cap equity funds invest in companies whose rank fall between 1 to 100 in terms of market capitalisation. These equity funds have relatively lower risk profile and are thus more stable than mid-cap and small cap-funds. In fact, under equity funds, large-cap funds are the least risky investment. However, this results in compromising on returns.

  1. Mid-cap equity funds
    As defined by SEBI, mid-cap funds invest the majority of their assets in companies that fall between the rank 101 to 250 in terms of market capitalisation. These equity funds are more volatile than large-cap funds, but less volatile than small-cap funds. They also offer higher returns than mid-cap funds. However, they usually produce lower returns than small-cap funds
  2. Small-cap funds
    SEBI defines small-cap funds as those equity funds that invest their portfolio in assets of companies that are ranked above 250 in terms of market capitalisation. These funds are highly volatile; however, they make up for that by producing significantly higher returns than mid-cap and large-cap funds.
  3. Large and mid-cap equity funds
    These mutual funds divide their equity asset allocation between large and mid-cap companies (33% each of their total assets). As these funds are invested in both large-cap and mid-cap funds, they offer an amazing amalgam of significant returns and lower volatility.
  4. Multi-cap equity funds
    Multi-cap equity funds invest their assets (at least 65% of their total assets) in equity-shares of small-cap, mid-cap, and large-cap funds in varying proportion. Fund manager of multi-cap equity funds keep rebalancing their investment portfolio to match the investment objective of the scheme. They also take into account external factors such as economic and market conditions and make necessary changes as and when required.

Investing in equity mutual funds is comparatively lesser risky investment option that investing in direct stocks of the companies. What’s more, with equity funds you enjoy professional management of the fund manager. Equity mutual funds are ideal for investors who wish to stay invested in the market for a prolonged duration and earn significant returns on their mutual fund investments. Happy investing!