Understanding Equity Mutual Funds: A Fundamental Overview
Right since its inception, Mutual Funds have evolved into a preferred investment tool for many investors. However, choosing the right Mutual Fund scheme can be a difficult task due to the wide array of options available. Investment requires a careful and well-thought-out approach to avoid potential losses. Hence, it is imperative to understand the basics of the different types of schemes available to you. Here, we will explore Equity Mutual Funds and talk about the different types of equity funds along with their benefits and a lot more.
Equity scheme
Equity Funds are a kind of Mutual Funds that invest in the stock markets. The stocks are selected by a team of professionals who try to deliver maximum returns from your investments while keeping risk in control.
Basics
Equity Funds give you a diversified portfolio. Most funds have 40-50 stocks in their portfolio. This reduces the risk you take.
- Objective: To generate high returns by investing predominantly in stocks.
- Risk Level: High, as it is subject to market fluctuations.Equity Funds can see some ups and downs in the short-term, so you will need to be patient.
- Investor Profile: Suitable for investors with a higher risk appetite and a long-term investment horizon.Invest in Equity Funds only if you can stay invested for at least 5 years
- Returns: These mutual funds invest at least 65% of the capital in equities and equity securities, while the remaining 35% is invested in money-market instruments or debt instruments. The returns of the investments in equity mutual funds range from 10% to 12%, which can sometimes also beat market growth and inflation.
Types of Equity Funds:
Large Cap Funds:
- Objective: Invest in stocks of large, well-established companies with a proven track record.
- Investment Approach: Prioritize stability and liquidity, typically holding blue-chip stocks.
- Suitability: Suited for conservative investors seeking stability and steady returns.
- Risk Level: Lower compared to mid and small-cap funds due to the stability of large-cap stocks.
Details
Large Cap Funds are a type of mutual fund that primarily invests in stocks of well-established companies with large market capitalization. These funds focus on blue-chip stocks, aiming to provide investors with a balance of capital appreciation and stability. They have a relatively lower risk compared to mid and small-cap funds, making them suitable for conservative investors. Managed by experienced fund managers, Large Cap Funds offer diversification by investing in a basket of large-cap stocks, reducing the risk associated with individual stock movements. Investors may earn returns through dividends and capital gains. Suited for those seeking stability in their portfolio, Large Cap Funds are considered a core holding for long-term investors. Examples include HDFC Top 100 Fund, ICICI Prudential Bluechip Fund, and SBI Bluechip Fund.
Mid Cap Funds:
- Objective: Invest in stocks of mid-sized companies with potential for growth.
- Investment Approach: Seek a balance between stability (like large caps) and growth (like small caps).
- Suitability: Suited for investors with a moderate risk appetite looking for growth opportunities.
- Risk Level: Moderate, as mid-cap stocks can be more volatile than large caps.
Details
Mid Cap Funds are a category of mutual funds that predominantly invest in stocks of companies with medium market capitalization. These funds aim to strike a balance between the growth potential of small-cap stocks and the stability of large-cap stocks. Mid-cap companies are considered to be in a phase of expansion, and their stocks may offer higher growth potential but with increased volatility compared to large caps. Mid Cap Funds are suitable for investors with a moderate risk appetite seeking capital appreciation over the long term. These funds are actively managed by experienced fund managers who analyze and select mid-cap stocks based on their growth prospects. Examples of Mid Cap Funds include DSP Midcap Fund, Kotak Emerging Equity Fund, and Franklin India Prima Fund.
Small Cap Funds:
- Objective: Invest in stocks of small-sized companies with high growth potential.
- Investment Approach: Focus on emerging companies with the potential for significant expansion.
- Suitability: Suited for aggressive investors comfortable with higher risk for potentially higher returns.
- Risk Level: Higher, as small-cap stocks can be more volatile and less liquid.
Details
Small Cap Funds belong to the category of mutual funds that primarily invest in stocks of companies with small market capitalization. Small-cap stocks typically represent companies with a lower market value, indicating their potential for significant growth but also higher volatility. Small Cap Funds aim to capitalize on the growth opportunities presented by smaller companies, making them suitable for investors seeking aggressive capital appreciation over the long term. Due to their higher risk and reward profile, these funds are recommended for investors with a high-risk tolerance. Fund managers actively manage Small Cap Funds, selecting stocks with growth potential within the small-cap segment. Examples of Small Cap Funds include SBI Small Cap Fund, HDFC Small Cap Fund, and Axis Small Cap Fund.
Multi Cap Funds:
- Objective: Offer a diversified portfolio by investing across large, mid, and small-cap stocks.
- Investment Approach: Flexibility to adjust allocation based on market conditions and opportunities.
- Suitability: Suited for investors seeking diversification across market caps within a single fund.
- Risk Level: Moderate to high, depending on the fund’s allocation among different market caps.
Details
Multi-Cap Funds are a category of mutual funds that invest in stocks across different market capitalizations, including large-cap, mid-cap, and small-cap stocks. This flexibility allows fund managers to adapt to changing market conditions and capitalize on opportunities across the entire spectrum of the stock market.
The allocation between large-cap, mid-cap, and small-cap stocks may vary based on the fund manager’s outlook and the fund’s investment strategy. Multi-Cap Funds offer a balanced approach, providing investors with exposure to companies of different sizes. This diversification helps manage risk, making Multi-Cap Funds suitable for investors seeking a well-rounded investment portfolio.
Investors looking for a diversified equity portfolio with the flexibility to navigate various market scenarios often consider Multi-Cap Funds. Popular examples of Multi-Cap Funds include Kotak Standard Multicap Fund, Parag Parikh Long Term Equity Fund, and Aditya Birla Sun Life Equity Fund.
Dividend Yield Funds:
- Objective: Focus on stocks with high dividend yields.
- Investment Approach: Prioritize companies with a history of paying dividends.
- Suitability: Ideal for investors seeking regular income along with potential capital appreciation.
- Risk Level: Generally lower risk compared to growth-oriented funds.
Value Funds:
- Objective: Follow a value investing strategy, aiming to invest in undervalued stocks.
- Investment Approach: Identify stocks believed to be trading below their intrinsic value.
- Suitability: Suitable for long-term investors looking for potentially overlooked opportunities.
- Risk Level: Moderate, with an emphasis on fundamental analysis.
Contra Funds:
- Objective: Contrarian funds that invest against prevailing market trends.
- Investment Approach: Capitalize on potential reversals in market sentiment.
- Suitability: Geared towards investors with a contrarian investment approach.
- Risk Level: Moderate to high, given the contrarian nature of the strategy.
Focused Funds:
- Objective: Concentrate the portfolio in a limited number of stocks (typically 30-50).
- Investment Approach: Focus on the best-performing stocks for higher returns.
- Suitability: Geared towards investors seeking potentially higher returns and accepting concentrated risk.
- Risk Level: Relatively high due to the concentrated nature of the portfolio.
Sectoral/Thematic Funds:
- Objective: Concentrate on specific sectors or themes (e.g., technology, healthcare).
- Investment Approach: Offer targeted exposure to a particular industry or trend.
- Suitability: Suitable for investors looking to capitalize on specific sectors or emerging trends.
- Risk Level: Higher, as these funds are more susceptible to sector-specific risks.
ELSS (Equity Linked Savings Scheme):
- Objective: Equity-oriented mutual funds with a lock-in period of three years.
- Investment Approach: Invest in a diversified portfolio of equities with a tax-saving focus.
- Suitability: Ideal for investors seeking tax benefits under Section 80C of the Income Tax Act.
- Risk Level: Similar to other diversified equity funds, with a lock-in period providing stability.
Investment Style-based Categorization
- Active Funds – These schemes are actively managed by the fund managers who handpick the stocks that they want to invest in.
- Passive Funds – These schemes usually track a market index or segment which determines the list of stock that the scheme will invest in. In these schemes, the fund manager has no active role in the selection of the stocks.
Invest in Equity Mutual funds on Findola.
If you are sure about getting started and ready to invest in equity mutual funds, you can also invest in them through Findola by simply following the steps below:
Step 1: Download the Findola app from Play Store/App Store.
Step 2: Open an account and complete the KYC process.
Step 3: Click on the Invest tab, browse and choose the fund you want to invest in.
Step 4: Invest in the selected fund either in a lump sum or through an SIP.
Why Should You Invest in an Equity Mutual Fund?
Equity mutual funds pool money from investors to invest primarily in stocks or equities. They offer several advantages:
- Growth Potential:
- Equity funds aim for capital appreciation, providing an opportunity for significant returns over the long term.
- Professional Management:
- Skilled fund managers make investment decisions, leveraging expertise for optimal stock selection.
- Diversification:
- Investments span various stocks, sectors, and market caps, reducing risk through diversification.
- Accessibility and Liquidity:
- Investors can start with modest amounts, and funds offer daily liquidity for buying or selling units.
- Expert Stock Selection:
- Fund managers conduct in-depth research to choose fundamentally strong stocks.
- Systematic Investment Plans (SIPs):
- SIPs allow regular, disciplined investments, fostering financial discipline.
- Long-Term Wealth Creation:
- Suited for achieving long-term financial goals like retirement planning or children’s education.
- Tax Benefits:
- ELSS funds offer potential tax benefits under Section 80C of the Income Tax Act.
Investors should consider their financial goals, risk tolerance, and investment horizon before choosing equity funds, ensuring alignment with their overall financial plan.
FAQs
Who are equity mutual funds most suitable for?
These funds can be suitable for:
- Long-Term Investors:
- Individuals with a horizon extending beyond short-term gains, who aim for sustained wealth accumulation and capital appreciation over the years.
- Risk-Tolerant Individuals:
- Those comfortable with market fluctuations and possessing a higher risk tolerance, recognizing that equities entail volatility but offer potential for significant returns.
- Goal-Oriented Investors:
- Individuals with defined financial objectives, such as retirement planning, funding higher education, or creating a corpus for significant life events.
- Investors Seeking Growth:
- Those primarily seeking growth-oriented investments, as equity mutual funds focus on capital appreciation by investing in stocks with growth potential.
- Diversification Advocates:
- Investors recognizing the importance of diversification in managing risk, as equity funds spread investments across various stocks, sectors, and market caps.
- Tax Savvy Individuals:
- Individuals looking for tax-saving options may find Equity Linked Savings Schemes (ELSS) within the equity fund category appealing, combining wealth creation with tax benefits.
- Systematic Investment Planners:
- Individuals committed to disciplined and regular investing can leverage Systematic Investment Plans (SIPs) offered by equity mutual funds for a structured approach.
- Those Aware of Market Dynamics:
- Investors with an understanding of market trends, economic indicators, and a proactive approach to staying informed about stock performance.
Disclaimers:
An investor education initiative By Findola Wealth Research Team.
This article is generated and published by Findola Wealth Research Team.
Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.
