Investing in Equity funds has become quite popular in India. It is a kind of mutual fund in which you need to invest principally on the sticks, which can be managed in both ways, actively as well as passively. Due to its nature, it is popularly known under the name of stock funds too. The idea of mutual funds can be broadly categorized based on the size of the company, the investment pattern of the holdings in the fields of the portfolio as well as geography.
Definition of Equity Funds:
The idea of an equity mutual fund deals with the idea of investing the assets in the listed securities of the stock market. According to the SEBI guidelines, an equity fund must invest a minimum of sixty-five percent of its total assets in either equities or in the instruments that are directly related to equity.
It can invest an average balance ranging between 0-35%. This investment can be made either in terms of debt or through money management market securities. Although these schemes can be managed actively and passively, India’s equity mutual funds have usually managed actively.
Classification of Equity Funds:
The equity funds are usually categorized based on the size of the listed company the shares are invested in, the geographical standards on which those investments are focused, and the investment style. Well, under the standards of SEBI, the equity investment can be classified into the following categories:
Based on Capitalization
The Large Capital Equity Fund: It is open-end equity schemes that invest a minimum of 80% of the total assets in large companies’ shares. In other words, it can be said that this equity scheme deals with the top 100 companies in the term of the total capitalization value in the market. These funds usually generate low returns if compared to the small capital and mid capital equity funds.
The Mid Capital Equity Fund: It is an open-end equity scheme which invests about 65% of the total assets in the mid capital stocks. These funds are likely to provide higher returns than large capital funds. However, they are prone to higher volatility in comparison to other types of funds. These funds are the most suitable type for investors who are ready to take up high-risk investments.
The Small Capital Equity Fund: These open-ended equity schemes require a minimum of 65% of the total assets in the small-sized stocks. As per India’s economic condition, about 95% percent of companies in India fall under this Cato. These small capital equity funds are best suited for investors who are ready to take up volatile risks and have a strong motive to earn higher returns.
There are a few types of equity funds that are invested in the security sector of the field of pharmaceutical, Banking, automobile, Information Technology, etc. Such equity funds are known as sectoral funds.
Here are the types of equity mutual funds in detail.
You will find various ways through which you can categorize the equity mutual funds. Follow on to know them in brief.
Investment Strategy- based categorization
Theme and sectoral funds- This type of equity fund decides explicitly to follow a specific investment theme. It can be like an international stock theme or that of the emerging market theme. You will also find some theme to have an investment in a particular sector. It can be anything, like I.T., BFSI, Pharmaceutical and many more! Note that these sector or theme-based funds are actually riskier as they focus on a specific theme.
These funds invest in a maximum of 30 stocks of the different companies. It has market capitalization as it has been specified at the launch time of the scheme.
Contra equity fund-
These funds are known to follow a contrarian strategy of investing. These schemes help the market analyze the various under-performing stocks and purchase them at lower prices.
Market capitalization- based categorization
These schemes might decide to invest in companies that are known to have specific capitalization. Here are some of the common types.
Large-cap funds are considered those types that invest a minimum of 80% of their total assets in equity shares. These equity shares could be of the large-cap companies. Generally, they are considered for the top 100! These schemes are known to be more stable than the small-cap or the mid-cap focused funds.
It invests for around 65% of their total assets in equity shares. These are for the small-cap companies. Indeed, there is a huge list that follows for this category.
This type usually invests around 65% of their total assets via mid-cap companies’ equity shares. These schemes are known to offer greater success than the large-cap schemes. But note than this can be more volatile than them!
These Funds are known for being the only equity scheme that offers tax benefits of greater value. These schemes can invest a minimum of around 80%of its total shares in shares and equity! These have a lock-in period of 3 years.
How does the equity mutual funds work?
Interestingly, you will find that the equity mutual funds are classified to its name if an investment is something that accounts for more than 60%of the total assets in the equity shares of various companies. You can see that the balance amount gets invested in debt securities or money market instruments. Yes, it depends on the investment objective of the schemes. Moreover, the fund manager can also choose to invest in a value-oriented or growth-oriented manner. They can select the companies as per the assessment of the investment that generates most of the returns.
How should you invest in an equity mutual fund?
The first thing that is essential to get started with the process is accessing your financial goals and risk tolerances. You can also choose to look for the investment horizon carefully before you sign on the dotted lines! The approach can be different for different investors. If you are a seasoned investor, there are many types of equity funds that are available for you. These schemes are typically known for being invested in the companies that stand best in the market!
Interestingly, domestic equity mutual fund investment has seen long rough rides over the past couple of years. For many of you, the investment that is made through SIP(Systematic Investment Plan) have known to decline in value significantly across the major categories. The debts markets have also been rather more volatile over the past year.
As it is said, the U.S. opted to focus mutual funds as one of the categories which has solid performance year-to-date and even over the last three years. Indeed, it has all gone unnoticed!
Situation in recent years!
As per 2019, the U.S. focused funds to deliver 14-26 percent returns. The diversified domestic schemes managed around -5% to 1.9% growth in their NAVs. Yes, it depends on the category to which they belong. It can be seen that over the last recent years, U.S. focused FoFs have delivered around 11% to 19% compounded annual returns. In this case, the domestic funds were managed for around just 5% to 9%.
The bottom line
Contextually, it has been seen that the upswing in the U.S. economy in recent years has helped the US-focused beat the domestic equity schemes to a much larger extent. The U.S. market has been to rally across the last years. Indeed, they are backed with healthy GDP growth.