Types of Equity Funds

Equity funds can be categorised based on the investment mandate and primary investment avenues.
Types of Equity Funds
3 min
06-June-2024

Equity mutual funds in India can be classified by market capitalization, investment strategies, or tax benefits. They have various types for different investment strategies and risk appetites. Growth funds aim for capital appreciation by investing in rapidly growing companies. Value funds seek undervalued stocks with potential for long-term growth. Income funds prioritize regular dividends and stable income streams. Sector funds concentrate investments within specific industries, while index funds track market benchmarks. Balanced funds offer a mix of stocks and bonds for balanced risk-return profiles.

Overview of equity funds

An equity mutual fund is a type of mutual fund scheme that invests predominantly in the equity market. Its portfolio consists primarily of equity stocks from different companies. The stocks are chosen based on the type of fund, its investment objective, investment style and overall goals.

Equity funds generally tend to carry a higher level of risk than debt mutual funds and money market funds. This is because their returns are heavily dependent on how the market performs and how the prices of the stocks in their portfolios move over the investment tenure.

Types of equity mutual funds

The Securities and Exchange Board of India (SEBI) has categorised equity mutual funds into multiple types to help investors choose the right investment option. Let us take a closer look at the various equity fund categories, including the different types of funds.

Equity funds based on market capitalisation

Equity funds are categorised based on the market capitalisation of the stocks that they invest in. Here is a quick overview of some of the types of equity mutual funds under this category.

Large-cap equity funds

These funds invest a minimum of 80% of their total assets in large-cap companies. The top 100 companies in terms of market capitalisation listed on the stock market are classified as large-cap. These companies are well-established within their industry and are known to deliver strong financial performance.

Mid-cap equity funds

Mid-cap equity funds invest a minimum of 65% of their total assets in mid-cap companies. Mid-cap companies are entities ranked between 101 and 250 in terms of market capitalisation. These companies usually have significant potential for growth but are perceived to be slightly more risky.

Small-cap equity funds

Small-cap equity funds invest a minimum of 65% of their total assets in small-cap companies. Small-cap companies are entities ranked 251 and above in terms of market capitalisation. These companies are in their nascent stage and have high growth potential but carry very high risks.

Large-cap and mid-cap equity funds

These funds invest a minimum of 35% of their total assets in large-cap companies and 35% in mid-cap companies. They offer benefits like stability, diversification and potential for capital appreciation.

Multi-cap equity funds

Multi-cap funds invest a minimum of 75% of their total assets in equity stocks across different market capitalisations for better diversification.

Flexi-cap equity funds

Similar to multi-cap funds, flexi-cap equity funds invest a minimum of 65% of their total assets in equity stocks across different market capitalisations. However, these funds adopt a more dynamic approach and may change market-cap allocations based on market conditions and other factors.

Equity funds based on the investment style

Equity mutual funds can also be categorised into two types based on their investment style. Here is a closer look at each of these two types of equity funds.

Actively-managed equity mutual funds

These equity mutual funds are actively managed by fund managers, who are professionals with years of experience in the stock market. The fund managers make investment decisions based on thorough research, market analysis and their expertise. The primary objective of these funds is to outperform their benchmark market index.

Passively-managed equity mutual funds

These mutual funds invest in the same constituents as their benchmark market index, following the same proportion and weightage. The primary goal of these funds is to replicate the returns generated by the benchmark. The role of fund managers is very minimal.

Equity funds based on the investment objective

The investment objective is another one of the equity fund categories. Let us quickly look at the mutual funds that feature under this category.

Growth equity funds

Growth funds aim to offer the benefit of capital appreciation and invest primarily in equity stocks with significant growth potential.

Income equity funds

Income equity funds aim to provide regular income by way of dividend payments by investing predominantly in dividend-paying stocks.

Value funds

These equity mutual funds follow the value investment strategy, which involves investing in undervalued stocks.

Contra funds

Contra funds follow the contrarian investment strategy, which involves going against the prevailing market trends.

Focused funds

Focused equity funds invest a minimum of 65% of their assets in equity stocks. Unlike other funds, they have a maximum portfolio limit of 30 stocks.

Sectoral and thematic funds

These types of equity mutual funds invest a minimum of 80% of their assets in equity stocks belonging to a specific sector or a particular theme.

Equity funds based on the mutual fund structure

Depending on how a scheme is structured, the following two equity fund categories exist.

Open-ended equity mutual funds

These are equity funds that you can invest in or redeem your investments from at any time, on any business day.

Close-ended equity mutual funds

These equity mutual funds have a defined investment tenure. You can only redeem your investments after this period.

Equity funds based on tax benefits

Among the different equity mutual fund types are Equity-Linked Savings Schemes (ELSS), which invest a minimum of 80% of their assets in equity and equity-related instruments. The investment you make in these funds can be claimed as a tax deduction from your total income to the tune of Rs. 1,50,000 per financial year.

Who should invest in equity funds?

Equity mutual funds are typically better suited for aggressive investors and moderate risk-takers because they are riskier than fixed-income instruments. Here is a broad overview of the types of investors who may find equity funds suitable.

Investors with a high tolerance for risk

Investors with a high tolerance for risk may find equity funds suitable because they can withstand price volatility better. The payoff for earning potentially higher returns from the equity market is taking on additional risk.

Investors with a long-term outlook

Investors with a long-term investment outlook may also prefer equity funds because stocks tend to perform better over the long term. A longer investment horizon makes it possible to ride out short-term volatility more effectively.

Investors who aim to create wealth

If wealth creation is one of your primary objectives, you need to consider investing in the equity market to earn potentially inflation-beating returns. Equity mutual funds can help you with this because they are curated to meet various long-term goals, including wealth creation.

Beginners who wish to invest in the equity market

Beginners in the stock market may find it challenging to invest in direct equity because of the sheer amount of research involved and the knowledge required. Equity mutual funds managed by professional fund managers offer an effective alternative for such investors who do not have the expertise required to directly invest in stocks.

Conclusion

This sums up our guide on the different equity fund categories you can choose from. On the Bajaj Finserv Mutual Funds Platform, you can find 1,000+ mutual funds in different categories, including all the above-mentioned types of equity mutual funds. All you need to do is compare mutual funds, select those that align with your requirements and start a SIP investment or make a lumpsum investment in those mutual fund schemes.

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Frequently asked questions

Why should I start investing in equity mutual funds?
Investing in equity mutual funds gives you the benefit of diversification as well as potential market-linked returns.
What is the benefit of staying invested in equity funds over the long term?
By remaining invested in equity funds over the long term, you can ride out short-term market volatility. If you choose to invest in equity funds via SIPs, you can also benefit from rupee cost averaging and the power of compounding.
How many types of equity mutual funds are there?
There are nearly 20 different equity fund categories based on different parameters like the market cap, investment objective, management style, structure and more.
Why is it called an equity mutual fund?
The name stems from the fact that these mutual funds invest a large portion of their assets in equity and equity-oriented instruments.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.