Equity funds tend to generate higher returns than most other types of mutual fund. This is because they predominantly invest in stocks. These funds are also known as growth funds, as their value increases with the success of the company whose stock the fund has invested in. In India, an equity mutual fund is among the highest-performing instruments. However, it is also a higher risk investment, since its performance depends on the stock market.
So, keep your investment goals, timeframe and risk appetite in mind before choosing the type of mutual fund to invest in. After that, it’s very simple. All you need to do is complete the KYC registration process and you’re good to go.
Let’s take a look at the different types of equity funds available in India:
Sectoral and Thematic Mutual Funds
Equity funds are differentiated on the basis of sectors and themes. Sectoral funds invest in one specific sector, such as pharmaceuticals or technology. On the other hand, thematic funds focus on a specific subject or category. So, when you invest in them, you will be investing in either emerging companies or international stocks, and so on.
Based on Market Capitalisation
Companies and their stocks are classified according to the market capitalisation or total value of the company. Equity funds can also be chosen based on this value. The different variety of funds you can choose from are:
- Large-cap equity funds: Funds that invest in the biggest companies on the stock market. These companies tend to higher share prices, are well-established and have provided consistent returns in the past, due to stability. These are often an excellent choice for investors with a long-term investment horizon.
- Mid-cap equity funds: These funds invest in medium-sized companies. Mid-cap funds are also quite stable and offer potential for growth. However, they are not as stable as large-cap funds.
- Mid- and small-cap equity funds: These funds invest in a mix of mid-sized and small companies. These are the companies with the most potential for growth and therefore the fund could potentially offer good returns, albeit at higher risk.
- Small-cap funds: These invest in small-sized entities. They tend to entail high risk but also high potential for good returns, given you have an investment horizon of a few years.
- Multi-cap funds: These invest in stock across all categories of market capitalisation. The fund managers manage the funds according to market conditions to bring you the best returns possible.
Based on Investment Strategy
The approach that the fund provider/manager chooses for investment is known as the investment strategy. There are primarily four types of strategies:
- Value strategy: This is an investing style where the fund manager invests your funds in an undervalued company that has great potential to grow in the near future. The fund units are cheap at the time of purchase, helping investors acquire more, and are sold or held when the share price spikes.
- Growth strategy: This is an investing style where funds are invested in a company that is already performing well. It’s known as growth style, as these companies are expected to grow further and perform even better in the future.
- Top-down strategy: Here, the fund managers studies the mandate and invests in stocks of companies that have consistently shown good performance.
- Bottom-up strategy: In this style, the fund manager researches to find companies with a potential for growth, irrespective of the sector or theme they belong to.
Equity funds have been gainign popularity in India in recent times. However, make sure you learn more about the mutual fund you wish to invest in and understand the terms and condtiions carefully to make an informed choice.