What is an 'Equity Fund'
An equity fund is a mutual fund scheme that invests predominantly in equity stocks.
In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity related instruments.
An Equity Fund can be actively managed or passively managed. Index funds and ETFs are passively managed.
Equity mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.
The size of an equity fund is determined by a market capitalization, while the investment style, reflected in the fund's stock holdings, is also used to categorize equity mutual funds.
Equity funds are also categorized by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). These can be broad market, regional or single-country funds.
Some specialty equity funds target business sectors, such as health care, commodities and real estate and are known as Sectoral Funds.
Ideal Investment Vehicle
In many ways, equity funds are ideal investment vehicles for investors that are not as well-versed in financial investing or do not possess a large amount of capital with which to invest. Equity funds are practical investments for most people.
The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund's portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund. A large amount of investment capital would be required for an individual investor to achieve a similar degree of risk reduction through diversification of a portfolio of direct stock holdings. Pooling small investors' capital allows an equity fund to diversify effectively without burdening each investor with large capital requirements.
The price of the equity fund is based on the fund's net asset value (NAV) less its liabilities. A more diversified fund means that there is less negative effect of an individual stock's adverse price movement on the overall portfolio and on the share price of the equity fund.
Equity funds are managed by experienced professional portfolio managers, and their past performance is a matter of public record. Transparency and reporting requirements for equity funds are heavily regulated by the federal government.
A Fund for Everyone
Equity funds are very popular amongst the retail investors among various categories of mutual fund products. Whether it’s a particular market sector (technology, financial, pharmaceutical), a specific stock exchange (such as the BSE or NSE), foreign or domestic markets, income or growth stocks, high or low risk, or a specific interest group (political, religious, brand), there are equity funds of every type and characteristic available to match every risk profile and investment objective that investors may have.
What are different categories of Equity Funds
There are different types of equity mutual fund schemes and each offers a different type of underlying portfolio that have different levels of market risk.
Large Cap Equity Funds invest a large portion of their corpus in companies with large market capitalization are called large-cap funds. This type of fund is known to offer stability and sustainable returns, over a period of time.
Large Cap companies are generally very stable and dominate their industry. Large-cap stocks tend to hold up better in recessions, but they also tend to underperform small-cap stocks when the economy emerges from a recession. Large-cap tend to be less volatile than mid-cap and small-cap stocks and are therefore considered less risky.
Mid-Cap Equity Funds invest in stocks of mid-size companies, which are still considered developing companies. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. Mid-cap stocks, however, tend to offer more growth potential than large-cap stocks.
Small Cap Funds invest in stocks of smaller-sized companies. Small cap is a term used to classify companies with a relatively small market capitalization. However, the definition of small cap can vary among market intermediaries, but it is generally regarded as a company with a market capitalization of less than ₹ 100 crores. Many small caps are young companies with significant growth potential. However, the risk of failure is greater with small-cap stocks than with large-cap and mid-cap stocks. As a result, small-cap stocks tend to be the more volatile (and therefore riskier) than large-cap and mid-cap stocks. Historically, small-cap stocks have typically underperformed large-cap stocks during recessions but have outperformed large-cap stocks as the economy has emerged from recessions.
The smallest stocks of the small caps are called micro-cap stocks. While the opportunity for these companies to experience extreme growth is great, the risk to lose a large amount of money is also possible
Multi Cap Equity Funds or Diversified Equity Funds invests in stocks of companies across the stock market regardless of size and sector. These funds provide the benefit of diversification by investing in companies spread across sectors and market capitalisation. They are generally meant for investors who seek exposure across the market and do not want to be restricted to any particular sector. They invest in companies across different market caps and hence reduce the amount of risk in the fund. Diversification helps prevent events that could affect a single sector for affecting the fund, and hence reduce risk.
Market capitalization (commonly known as market cap) is calculated by multiplying a company’s outstanding shares by its stock price per share. A company’s stock price by itself does not tell much about the total value or size of a company; a company whose stock price is say ₹500 is not necessarily worth more than a company whose stock price is say, ₹250. For example, a company with a stock price of ₹500 and 10 million shares outstanding (a market cap of ₹5 billion) is actually smaller in size than a company with a stock price of ₹250 and 50 million shares outstanding (a market cap of ₹12.5 billion).
Thematic Equity Funds: These funds invest in securities of specific sectors such as Information Technology, Banking, Service and pharma sector etc., which is specified in their scheme information documents. So, the performance of these schemes depends on the performance of the respective sector. These funds may give higher returns, but they also come with increased risks
Equity Linked Savings Scheme (ELSS):
Equity-Linked Savings Scheme (ELSS) is an equity mutual fund investment that invests at least 80 per cent of its assets in equity and equity-related instruments. ELSS can be open-ended or close ended. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of ₹1.5 lakh. The amount you invest in ELSS is deducted from your taxable income, which helps you lower the amount of income tax you are liable to pay. Investments in ELSS are subject to a three-year lock-in period.
Investing in equity mutual funds comes at slightly higher risk as compared to debt mutual funds, but they also give your money a chance to earn higher returns. Now that you know more about different types of equity mutual funds, what are you waiting for? Contact your investment advisor today.