Equity Mutual funds invest primarily in equity shares of listed companies across sectors and market capitalization segments. Equity mutual funds in India are one of the best long term investment products and ideal for meeting your long term financial goals like, retirement, higher education and marriage of your children or simply for creating wealth.
But before we explore what are the various types of equity mutual funds, let us first see the benefits of investing in equity mutual funds in India.
What are the various types of equity funds?
There are various types of equity funds suiting the different risk profile of respective investors. Investors must choose equity mutual funds based on their risk taking appetite and investment horizon. We suggest that one must have a minimum 5 year investment horizon to invest in equity mutual funds.
Diversified equity funds
Diversified equity mutual funds invest across various sectors and market capitalizations which ensure that the negative performance of one sector does not affect the entire portfolio and increases the possibility of making a sustainable return in the long run. Diversified equity mutual funds aim for medium to long term capital appreciation and are suitable for investors with high risk profile and investment horizon- of at least 5 years.
Large cap equity funds
As the name suggests, large cap equity funds invest in large cap companies which have a market capitalization of over Rs 20,000 Crores. These companies are large and well established names with strong market share. Large cap companies are generally considered safer investments compared to mid and small cap companies. Large cap funds are suitable for Investors with moderately high risk profile and investment horizon of at least 5 years. Some of the well-known large companies are HDFC Bank, Tata Motors, Infosys, Reliance Industries, State Bank of India, ICICI Bank and Maruti Suzuki etc.
Mid and small cap equity funds
Mid and small cap equity mutual funds invest primarily in mid and small companies of different sectors which typically have market capitalization ranging from Rs 5,000 Crores to upto Rs 20,000 Crores. These companies are less well known and therefore perceived to be riskier. But if the right mid and small company stocks are identified by the fund manager then they can be multi-baggers too.Mid and small cap equity funds are suitable for Investors with high risk profile having investment horizon of 5 years or more.
Would you like to know what should be the percentage of mid-caps in your mutual fund portfolio?
Equity-linked Saving Schemes
Equity-linked Saving Schemes or ELSS Funds are essentially diversified equity funds but they have lock-in period of 3 years from the date of investment as one can save taxes under Section 80C of The Income Tax Act 1961 by investing maximum Rs 150,000 in a year. ELSS funds are suitable for Investors who have minimum 3 years investment horizon after which they can redeem their investments, if they so wish.
Among all the tax savings options ELSS has the least lock-in period and have created maximum wealth for the investors compared to traditional tax saving options. In the last 10 years good performing ELSS funds have given annualized return between 11-14% which is quite higher compared to PPF, NSC and tax savings fixed deposits (source: Avisorkhoj)
You must read – Did you know ELSS mutual funds are better option than PPF
Sectoral equity funds invest in companies of a single or related sector. Returns depend on the growth of the sector and if the sector does perform well, the returns can be more than that of large cap or diversified equity funds. Sectoral funds carry the highest risk and thus suitable only for investors with very high risk taking ability and long term investment horizon of beyond 5 years. Investment experts suggest that you should not have more than 15-20% of your total portfolio exposure to sector funds.
If you are interested in reading about sector funds, you may like to know if you should invest in banking sector mutual funds
Index fund invests in the basket of securities that replicates the composition of a market index, like Nifty, Sensex, Bank Nifty, CNX – 100, CNX – Midcap, Nifty - CPSE etc. Unlike diversified equity funds, fund manager of an index fund do not aim to beat the benchmark index but tries to replicate returns of the index it is following. The primary objective of an index fund is to reduce the tracking error with respect to the index. Since index funds are passively managed, the expense ratios of index funds are lower than actively managed funds.
As we can see equity funds are the best investment class not only because they offer superior returns over traditional investments, fixed deposits or Gold, but they are also tax efficient. Long term capital gains and dividends are tax free. Not only that using equity funds as an asset and investing through SIPs can help you achieve your long term financial goals. Equity funds help you save taxes too if you invest in ELSS Funds. Investors must assess their risk profile and the investment horizon before investing in the right equity mutual fund.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.