What are equity funds?

What are equity funds?

Contrary to popular thinking, mutual funds can have a mix of equity and debt securities. But, equity funds are those where the investor money largely goes into shares of various enterprises. Based on the weightage of different companies in the fund, the returns can range from 5%-18%. Equity funds tend to be a little riskier than mixed funds and debt funds.

Types of equity funds

There are many ways to categorize equity funds, and we will illustrate them all below.

In Based on market capitalization

Market capitalization means the monetary worth of a firm in the capital market, aka the total market value of all outstanding shares.

Large Cap funds: These equity mutual funds invest 80% or more in companies with large market capitalization or large-cap companies. The market cap is Rs 20k crore or more, being the largest 100 companies.

Mid-Cap Funds: They invest 65% of the money or more in mid-cap companies having a market cap of Rs 5000-20k crore. These companies generally occupy the 101-250th positions in an index.

Small-cap Funds: these equity funds invest 65% or more of the money in companies with less than Rs 5000 crore market capitalization. They come after rank 251 and are the majority of the Indian companies.

Multi-cap Funds: Here, the fund managers choose a mix of large-cap, mid-cap, and small-cap funds and park 65% of the funds at least.

One cannot objectively declare any fund as better than the others just based on size. Those looking for safe and stable returns may prefer large-cap funds, while those with a good risk appetite can consider small-cap funds, which may offer higher returns though with more volatility.

Based on Investment Type

Thematic Equity Funds: In these funds, all the companies in the mix follow one theme like agriculture, or rural development or sustainability, etc. For instance, the sustainability theme may include green energy companies, electric vehicle manufacturers, etc.

Sectoral Equity Fund: All the companies in a sectoral fund belong to the same sector of the economy like the pharmaceutical sector, or FMCG, or power corporations, etc.

Contra Equity Funds:These funds run contrary to market trends, identifying underperforming stocks to invest in, hoping that the companies have good business models and will recover in the long run.

Focused Equity Funds: These funds are allowed to invest only in 30 companies as per SEBI norms but with any market capitalization.

Based on Investment Manager Activity

Passive Funds: These equity mutual funds are not actively intervened by managers and may track an index from which the stocks are picked, ex: ETFs.

Active Funds: In this type, a fund manager monitors the stocks’ performance and changes the weightage if needed.

Should You Invest In An Equity Fund?

You can invest in mutual funds of equity-type to get high returns. However, when you choose an equity fund, you must check its performance over the last 5 years at least. If the fund does not outperform the stock market, then it's not very well-managed. Especially as a new investor choosing a safe, large-cap fund is a good idea till you become seasoned at the game.

If you have a very high-risk appetite, you can look at some private equity funds managed by top professionals and promise very high rewards.

Be warned, though, that they are very risky.