What are Equity Mutual Funds?

Overall investments in financial instruments are abysmally low at 1–2%, with preference for traditional asset classes such as gold and real estate still taking the lion’s share. In such a scenario the share of mutual funds and equity mutual funds in particular will be even lower. Yet, given the awareness about equity as an asset class, it pertinent to delve into the benefits of investing in equity mutual funds. Let us talk about an investment option which fits across ages and risk appetites — Equity Mutual Funds.

What are Equity mutual funds?

Equity funds invest in stocks of companies across different sectors. While investing in stocks is the best way to participate in India’s growth story, stocks are the best option, the need to have sufficient time and knowledge may make direct stock investment unsuitable for some. Moreover, you would need to invest sizeable amounts to gain exposure to top stocks such as Eicher Motors, MRF or Page Industries. At such a time, equity mutual funds can be the way out. You can invest in these stocks either one time, or in small amounts through systematic investment plans (SIPs).

What are the different types of Equity Funds?

Equity Funds can be further categorized as large-cap, multi-cap, mid-cap and small-cap funds:

Large-cap Funds:

As the name suggests, these funds invest in stocks of large-cap companies, typically the top 100 or 200 stocks as per market capitalization. These companies are usually the market leaders and brands that can be recognized on the go. Among the equity category, large-cap funds can be looked upon as conservative sub-category as they invest in scrips which are less volatile viz-a-viz others.

Mid-cap Funds:

These funds invest in stocks of slightly lesser market capitalization compared to, large-cap funds. In a way, they invest in potential large-cap stocks. They offer a high risk-high return option for a moderately aggressive investor. There can be greater volatility in these funds during economic downturns or any major events.

Small-cap Funds:

These funds invest in companies with the least market capitalization. They offer investors an option to invest in smaller companies, which are potential mid-caps. They only suit aggressive investors.

Multi-cap Funds:

These funds invest across various market capitalizations. The choice of allocation towards stocks of different market caps lies with the fund manager(s). They decide upon the allocation based on the strategy adopted for the fund, market situation and so on. They offer the much desired flexibility of holding exposure to various market capitalizations.