What are equity mutual funds in India and their various types

25 November 2020

Equity Mutual funds invest primarily in equity shares of listed companies across various sectors and market capitalization segments. Equity mutual funds in India are one of the best long-term investment products and ideal for meeting your long-term financial goals like retirement, higher education, and marriage of your children or simply for creating wealth.

But before we explore what are the various types of equity mutual funds, let us first read the benefits of investing in equity mutual funds in India.

What are the various types of equity mutual funds in India?

There are various types of equity funds suiting different risk appetite of the investors. Investors must choose equity mutual funds that suit their risk appetite and investment horizon. However, ideally one must have a minimum 5-year investment horizon while investing in equity mutual funds to get the desired results.

1. Diversified equity mutual funds
   
   Diversified equity mutual funds invest across various sectors and market capitalizations which ensure that the negative performance of one sector does not affect the entire portfolio and increases the possibility of making a sustainable return in the long run. Diversified equity mutual funds are best suited for achieving medium to long term capital appreciation and are suitable for investors with high risk-taking ability with a minimum investment horizon of at least 5 years.


2. Large-cap equity funds
   
   As the name suggests, large-cap equity mutual funds invest in well renowned large-cap companies which usually have a market capitalization of over Rs 20,000 Crores. These companies are well-established names with strong market share. For example - Some of the well-known large-cap companies are HDFC Bank, Tata Motors, Tata Steel, Nestle, P&G, Infosys, Wipro, Reliance Industries, SBI, ICICI Bank and Maruti Suzuki, etc. As you can see, these companies have a long-term well-established track record and therefore can be considered safer investments compared to mid-size and smaller size companies. Investors with a moderately high-risk profile may invest in large-cap equity mutual funds with a 3-5 year investment horizon in mind.


3. Mid and small-cap equity funds
   
   Companies that have a market capitalization ranging from Rs 5,000 to up to Rs 20,000 Crores are considered to be mid and small-cap companies. Mid and small-cap equity mutual funds primarily invest in these companies which are from different sectors. As these companies are not well known, therefore, they are perceived to be risky. But a good fund manager has the expertise to identify the stocks of the right kind of mid and small company companies that can earn decent returns for the investors. Mid and small-cap equity mutual funds are best fit for investors with a high-risk appetite and the ability to hold on to the investments for a minimum of 5 years or even more.


4. Equity-linked Saving Schemes
   
   Equity-linked Saving Schemes or ELSS Funds are essentially diversified equity funds and among all the tax savings options under Section 80C, the ELSS has the least lock-in period of 3 years. The investors can save taxes under Section 80C of The Income Tax Act 1961 by investing a maximum of Rs 150,000 in a year. ELSS funds are suitable if investors have a minimum of 3 years of investment horizon and the ability to take moderately high to high risk. ELSS funds can be redeemed after 3 years.
   
   In the last 10 years, good performing ELSS funds have given annualized return between 11-14% which is quite higher compared to the traditional tax saving options like PPF, NSC, and tax savings FDs.


5. Sectoral Equity Funds
   
   Sectoral equity funds invest in companies of a single or related sector. Returns of these funds depend on the growth of the sector and how the companies chosen by the fund manager is performing over the period. While sectoral funds are the riskiest among all equity funds, the returns can be more than that of large-cap or diversified equity funds if the investor can bear the risk in the long term. Being a very risky fund the investors should have a minimum of 5-7 years of investment horizon and should not hold more than 10-15% exposure of the total portfolio to these funds.


6. Index Funds
   
   An index fund invests in the basket of securities that replicates the composition of a market index, like Nifty, Sensex, Bank Nifty, CNX – 100, CNX – Midcap, Nifty - CPSE, etc. Unlike other equity funds, the fund manager of an index fund tries to replicate returns of the index it is following and does not necessarily aim to beat the benchmark. The primary objective of an index fund manager is to reduce the tracking error while replicating the index return. Being passively managed funds, the expense ratios of an index fund is lower than that of an actively managed equity fund.

People Often Ask

1. What are the different types of equity mutual funds?
   
   The different types of mutual funds are
   
   
   • Large-cap mutual funds
   
   
   • Small-cap mutual funds
   
   
   • Mid-cap mutual fund
   
   
   • Sectoral mutual funds
   
   
   • ELSS
   
   
   • Index Funds


2. What are the different types of mutual funds in India?
   
   There are 3 types of mutual funds available in India, namely
   
   
   • Open-Ended Mutual Funds. Debt/Income Funds. Money Market/Liquid Funds. Sectoral Funds. Tax Saving Mutual Funds.
   
   
   • Close Ended Mutual Funds. Capital Protection Funds. Fixed Maturity Plans.
   
   
   • Interval Funds.


3. What are the best equity mutual funds in India?
   
   Some of the best equity mutual funds in India to invest in are
   
   
   • Axis long term equity fund
   
   
   • Parag Parikh Long Term Equity Fund
   
   
   • DSP midcap fund
   
   
   • Canara Robeco Emerging equities
   
   
   There are other good performing mutual funds as well but these are the best.


4. Which MF to buy now?
   
   There is no particular time to buy a mutual fund, however, there are some mutual funds that can be bought anytime
   
   
   • Canara Robeco Bluechip Fund.
   
   
   • Mirae Asset Hybrid Equity Fund.
   
   
   • Axis Bluechip Fund
   
   
   • SBI Small Cap Fund.


5. Which type of mutual fund gives highest return?
   
   The high-risk mutual funds give the highest returns. The top 3 highest risk mutual funds are
   
   
   • Tata Banking And Financial Services Fund
   
   
   • SBI Banking & Financial Services Fund
   
   
   • Mirae Asset Healthcare Fund

Conclusion

There are different types of equity mutual funds to fulfill different needs. Usually, beginners prefer large-cap equity funds whereas experienced investors divide their money across different mutual funds. One should be thorough with mutual funds and its types, then only invest in the mutual funds.