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 which suits their risk appetite and investment horizon. However, ideally one must have minimum 5 year investment horizon while investing in equity mutual funds in order to get the desired results.
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 minimum investment horizon of at least 5 years.
You may like to read why diversified equity mutual funds are ideal for retail investors
Large cap equity funds
As the name suggests, large cap equity mutual funds invest in well renowned large cap companies which usually have 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 long term well established track record and therefore can be considered safer investments compared to mid size and smaller size companies. Investors with moderately high risk profile may invest in large cap equity mutual funds with 3-5 years investment horizon in mind.
Mid and small cap equity funds
Companies which have market capitalization ranging from Rs 5,000 to upto 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 right kind of mid and small company companies which can earn decent return for the investors. Mid and small cap equity mutual funds are best fit for Investors with high risk appetite and the ability to hold on to the investments for minimum of 5 years or even more.
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 maximum Rs 150,000 in a year. ELSS funds are suitable if investors have minimum 3 years 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.
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 minimum 5-7 years of investment horizon and should not hold more than 10-15% exposure of total portfolio to these funds.
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 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.