Investors looking to use mutual funds to build their investment portfolio should understand that it is not possible to build wealth through one asset class. They should spread their investments across different asset classes. One should build his investment portfolio based on his risk appetite, investment horizon and financial goals. An investment portfolio may consist of a mix of different asset classes such as equity, debt, gold, etc. One good thing is that you can invest in all three asset classes through mutual funds.
A mutual fund is a pool of money received from investors sharing a common investment objective. This pool of funds is used by the fund manager to invest in stocks, bonds and other securities to help the scheme and investors achieve the common investment objective. Different mutual funds invest in different asset classes. Every mutual fund scheme has a risk profile which is determined on the basis of the investment decision taken to achieve its objective.
Equity mutual funds are one of the most sought-after mutual fund product categories because of their ability to help investors with their long-term financial goals. Equity mutual funds mainly invest in equity and equity related instruments. These are market-linked schemes that are ideal for investors taking a lot of risk and have a long-term investment horizon of five years or more. Since equity mutual funds invest the majority of their investible corpus in stocks, their portfolios are constantly exposed to market uncertainties. Hence, these funds should be reconsidered by investors who want to avoid risk and invest for a short duration. Equity mutual funds can be volatile in the short term and may even offer negative returns, but they may be able to generate inflation-adjusted returns in the long run. This is the reason why many investors prefer equity mutual funds, even though the investment risk in it is very high. Also, this risk of investing in equity funds can be mitigated through the Systematic Investment Plan option.
Product Categories under Equity Schemes
As of now, there are 12 product categories under the Equity Mutual Fund gamut. This classification has been done by the market regulator SEBI (Securities and Exchange Board of India). The reason behind this classification is for investors to understand the differences between equity schemes so that they can make an informed investment decision.
Let us have a look at all these 12 different equity mutual fund schemes that investors can consider adding to their investment portfolio –
large cap fund
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big hat
The fund invests the majority of its investible corpus in equity and equity related instruments of large cap companies. As per SEBI guidelines, all large cap funds invest at least 80% of their portfolio in stocks of large cap companies. These funds consider stocks of companies that are listed in the top 100 in terms of market capitalization.
mid cap fund
mid cap funds are Equity schemes that invest in shares of mid cap companies. Out of their total assets, mid cap funds allocate a minimum of 65% towards equity and equity related instruments of mid cap companies. Mid cap funds invest a major part of their investible corpus in companies between 101-250 in terms of market capitalization.
small cap fund
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small cap fund
There is a fund that invests in small cap stocks. Small cap funds invest in companies that have a market capitalization of Rs 500 crore or more. Out of its total assets, a small cap fund invests a minimum of 65% in small cap stocks. Small cap funds generally invest in companies that rank above 250 in terms of market capitalization.
Large and Mid Cap Funds
As the name suggests, large and mid cap funds invest in both large cap stocks and mid cap stocks. As per SEBI regulations, a large and mid cap fund should invest at least 35% of its total assets in mid cap stocks and 35% in large cap stocks.
Flexi Cap Fund
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Flexi Cap Fund
is an equity mutual fund that invests in market capitalization. There is no requirement for Flexi Cap Fund to have a minimum portfolio exposure to any market cap. These funds invest in stocks of large, mid and small cap companies. Out of its total assets, a flexi cap fund should hold at least 65% portfolio exposure in equity markets.
multi cap fund
There is often confusion between multi cap funds and flexi cap funds. Many investors are not able to understand the difference between these two. This is because both multi cap and flexi cap funds invest across the market capitalization. However, when it comes to multi cap funds, they should have a minimum exposure of 25% in each market cap, i.e. 25% in mid cap stocks, 25% in large cap stocks and 25% in small cap stocks.
dividend yield fund
Dividend Yield Fund is an equity mutual fund scheme that primarily invests in stocks that have a high dividend yield ratio. Out of their total assets, these funds invest a minimum of 65% of the portfolio in dividend paying stocks.
value fund
Value funds are mutual fund schemes that follow a value investing style. There are times when the shares of a company with large potential are available at a discounted rate compared to its intrinsic value. Value funds have the right to invest at least 65% of their assets in stocks following a value investment strategy.
Contra Funds
Contra funds are equity funds that follow a contrasting investment strategy. Out of their total assets, these funds invest a minimum of 65% in equities and equity-related instruments of publicly listed companies.
focused funds
Equity funds which focus on maximum 30 stocks to achieve the investment objective of the scheme are called as Focused Funds. SEBI has mandated these funds to invest minimum 65% of their total investible corpus in a maximum of 30 stocks. These funds do not follow an investment style based on market cap and can invest in stocks of companies belonging to different sectors and industries spread across the market capitalization.
Regional / Thematic Fund
Sectoral and Thematic Funds are equity mutual funds that invest the majority of their investible corpus in stocks of companies belonging to a specific sector or industry. It can be Automobile, IT, FMCG, Pharma, Petroleum etc. Markets regulator SEBI has ordered these funds to invest a minimum of 80% of their total assets in stocks belonging to certain sectors and industries.
Equity Linked Savings Scheme (ELSS)
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Equity Linked Savings Scheme (ELSS)
is a mutual fund scheme that comes with predetermined lock-in and tax benefits. It is the only equity fund that offers tax exemption on investments up to Rs 1.5 lakh. As per Section 80C of the Indian Income Tax Act, 1961, an individual can claim tax exemption on investing in ELSS. It is an equity fund which invests the majority of its investible corpus in equities and equity related instruments. SEBI mandates all equity schemes to invest a minimum of 80% of their total assets in shares of publicly listed companies.
Mutual Fund investments are subject to market risks. Returns from any mutual fund scheme are not guaranteed. Investors are expected to consult their financial advisor before investing. They can also reduce the overall investment risk in equity funds by opting for the Systematic Investment Plan option. Also known as SIP, a systematic investment plan is a sensible way to invest a portion of your total investible corpus over a period of time. Many a times people do not have lump sum amount to invest during the beginning of their investment cycle. Instead investors can consider opting for SIP. Monthly minimum investment SIP amount is usually low, and this is what makes investing in equity funds through SIP cost-effective. Investors may be able to gradually increase their corpus through systematic and disciplined SIP investments over a long period of time.
Since equity mutual funds usually require long-term investments, SIPs can help you stay consistent with your investments. You can also benefit from rupee cost averaging by reducing the average purchase cost of the units. Moreover, systematic and disciplined investment in equity funds is known to bring about a compounding effect. The power of compounding in mutual funds is when the interest earned on the initial investment amount starts generating profit of its own.
One can also refer to the SIP calculator to determine what one can possibly earn at the end of his/her SIP investment journey.
Mutual fund investments are subject to market risks, read all the documents related to the scheme carefully.