10 categories of equity mutual funds for wealth creation

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Published: August 10, 2018 10:13:33 AM

An equity fund is a mutual fund that invests primarily in stocks. SEBI, in order to remove ambiguity and bring uniformity, has defined 10 categories of equity mutual funds.

Financial Express/ BondsValue funds give freedom and flexibility to put money on the stocks which are undervalued.

After the recent re-categorisation of mutual funds by SEBI, 10 types of equity funds have emerged. An equity fund is a mutual fund that invests primarily in stocks. The various categories are defined according to the risk appetite, the market capitalisation of different stocks and financial goals associated with the fund.

Moreover, in order to bring uniformity amongst the AMCs and eliminate any overlapping definitions, SEBI defines large caps to be the first 100 largest companies based on the market capitalisation. Stocks which are ranked 101 to 250 on the basis of market capitalisation averaged across the BSE and NSE are mid-caps. Everything below is the small-cap category.

Unlike in the past, the large cap for found house A will be the same for fund house B. This move ensures investor protection. If you are are a new investor looking for a suitable fund type to invest in or if you are a seasoned investor inspired to reshuffle your portfolio, here is a list of 10 equity mutual fund categories you can invest in:

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1) Large Cap Equity Funds- These funds invest a major corpus of money in companies with large market capitalisation. Investors longing for a stable and sustainable return can invest in large-cap equity funds. They generally underperform small-cap stocks when the economy emerges from a recession. They are less volatile, hence considered less risky. After the new mandate, the minimum investment in large-cap companies should be 80 per cent of the scheme’s total assets.

2) Large and Mid-caps- It is purely a new category introduced by SEBI. These schemes are set to invest in both large-cap and mid-cap stocks. The minimum threshold of investment is 35 per cent in large-cap companies and 35 per cent in mid-cap companies.

3) Mid-cap Equity Funds- This fund invests in mid-size companies. It is less risky than the small-cap stock and riskier than a large-cap stock. For high-growth potential, investors invest in mid-size stocks. The market capitalisation of this fund is greater than small-cap funds and lower than the large-cap funds. This category is required to invest at least 65 per cent of total assets in mid-cap stocks.

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4) Small-cap equity funds- It invests in companies with small market capitalization. A market capitalisation of less than Rs 100 crores falls into small caps. Small-cap stocks are more volatile than large-cap and mid-cap stocks. They underperform large caps in times of recession. The minimum investment in the small-sized companies should be 65 per cent of the scheme’s total assets.

5) Multi-cap Equity funds/ Diversified equity funds- This funds invest in the stocks of companies across the market irrespective of the size and sector. It inherently gives the goodness of diversification and is meant for investors who seek exposure across the market. By investing in different categories across large-cap, midcap and smallcap the risk is balanced.

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6) Dividend yield- It is also a new category introduced by SEBI. The objective of this category is to invest in dividend-yielding stocks or stocks that pay periodic dividends. The fund manager will be required to invest between 65% and 80% of his corpus in stocks that have a dividend yield and higher than the average dividend yield of the market.

7) Value funds- This type of fund gives freedom and flexibility to fund managers to put money on the stocks which he/she believes are undervalued. There is a requirement to maintain a 65 per cent allocation to equities. The focus of the fund is in identifying stocks that are currently priced at a discount to their intrinsic value. This fund carries higher risk, but it can offer a better risk and reward proposition particularly in a heated market environment.

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8) Contra Funds- The minimum 65 per cent is required to be allocated to equities. In this fund type, the manager bets against the prevailing market trend and puts money on assets which are either under-performing or are depressed at the time.

9) Focused- This scheme has an objective to invest in a maximum of 30 stocks. A focused fund focuses on a limited number of stocks in a limited number of sectors. It is a good way of equity diversification. There is a requirement to invest at least 80% of assets in stocks.

10) Equity Linked Saving Scheme- This investment qualifies for tax deduction under section 80C of the Income Tax Act within the overall limit of Rs 1.5 lakh. This fund can be open-ended or close-ended and it mostly invests in equity and equity-related assets. There is a lock-in of 3 years and the returns from the scheme are often inflation adjusted at the time of maturity.

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