WHAT ARE EQUITY FUNDS IN MUTUAL FUNDS

What are Equity Funds in Mutual Funds?

Equity funds in mutual funds are the investments done in shares or stocks of companies. Equity funds are also said to be growth funds or stock funds.

Before investing, we must have complete and correct knowledge that helps us to understand the risk factors and where to invest.

Let us understand equity funds and mutual funds in detail.

I have written about mutual funds in detail and a few things about equity funds on my previous page. I have also written about stocks and shares on one of my pages. You may read them to gain basic knowledge about trading, stocks and mutual funds.

What type of trading is best for beginners?

How to earn money by investing in mutual funds?

I'm going to cover the entire detail of equity funds on this page. I will not be going to cover the topics that I have covered in my previous pages. Please read my previous pages.

How equity funds in mutual funds are managed?

Equity funds in mutual funds can be managed actively or passively.

Actively managed equity fund:

When a fund manager actively keeps a watch on the ups and downs of the stock market, do research about the company's overall status and position in the stock market and then decide the stocks to invest.

It is called an active equity fund since it is being actively managed by a fund manager.

Passively managed equity fund:

This type of equity fund is called a passive equity fund since they are not been scanned actively.

The fund manager doesn't do research about the stock or companies. They make a portfolio that mirrors popular market indexes such as Sensex or Nifty.

The fund manager will invest in the stocks of some top companies that make up the index in the same proportion.

The advantage of passive funds is lower fees as compared to active funds and less risk.

Categories of equity funds in mutual funds

Equity mutual funds are categorised into different types based on the investment objectives, style and risk. For simplification, these are the three main categories.

1 Size of the companies

2 Solution-oriented funds

3 Sector in which the company is operating

Let us understand the categories and subcategories in detail.

1 Size of the companies

According to the size of the companies we can divide them into four categories. Equity funds can be classified into large-cap, mid-cap, small-cap and multi-cap funds based on the market capitalization of the companies they invest in.

a) Large-cap equity funds:

The funds invested in big and well-established companies that are financially strong and have good reputations are called large-cap equity funds.

At least 80% is invested in large-cap stocks according to the SEBI guidelines. Large-cap funds invest in large companies with a market capitalization of over ₹20,000 crores.

Large-cap funds are usually less risky as compared to other funds. If you are looking for a safe investment then large-cap funds are good for you.

You can consider investing in blue-chip companies. The stocks of blue-chip companies are on the top and nearly risk-free.

Remember that you may get less returns by investing in large-cap companies or blue-chip companies.

b) Mid-cap equity funds:

As the name suggests it is the investment done in the middle size companies.

In this, at least 65% of investment is invested in mid-cap stocks. Mid-cap funds invest in medium-sized companies with a market capitalization of ₹5,000 to ₹20,000 crores.

It may give you more returns with a little bit higher risk.

If you looking for high returns, investing in midcap equity funds is the best option in the long term.

c) Small-cup equity funds:

Investment in small-size companies provides the highest returns with the highest risk.

Consider small-cup equity funds only if you can afford to take risks. Small-cap funds invest in small companies with a market capitalization of less than ₹5,000 crores. Hence, it may be on high risk.

d) Multi-cap equity funds:

Multi-cap funds are the funds invested 30% in debts or government bonds 35% in large-cap stocks and 35% in mid-cap stocks.

Multi-cap funds are the best for good returns and less risk.

2 Solution-oriented funds:

Solution-oriented mutual funds are a new category of equity mutual funds that are designed to achieve specific goals.

These funds are close-ended, with a five-year lock-in period.

They are suitable for investors who are looking for long-term investments with a specific objective.

Some examples of goals that solution-oriented funds can help with include:

- Retirement planning

- Child education planning

- Marriage planning

3 Sectoral Funds

The funds when invested in stocks of companies in a particular sector, such as technology, healthcare, or financial services are called Sectoral funds.

Unlike diversified funds that spread their bets across various sectors, sectoral funds put all their eggs in one basket, aiming to capitalize on the potential growth of a particular area.

When the chosen sector experiences a surge, sectoral funds can amplify your returns compared to diversified funds.

If you have expertise or strong conviction in a particular sector, sectoral funds allow you to capitalize on your insights. Moreover, sectoral funds still hold a basket of stocks within the chosen sector, reducing risk compared to holding individual stocks.

Benefits of Equity Funds

Here are some of the benefits of investing in equity funds:

Potential for high returns:

Equity funds have the potential to generate higher returns than other types of mutual funds, such as debt funds.

Diversification:

Equity funds invest in a portfolio of stocks, which helps to reduce risk.

Professional management:

Equity funds are managed by professional fund managers who have the expertise to select and manage a portfolio of stocks.

Liquidity:

Equity funds are highly liquid, meaning that investors can redeem their units at any time.

Sum Up

However, it is important to note that equity funds are also riskier than other types of mutual funds. The value of equity funds can fluctuate with the stock market, and investors could lose money.

Before investing in any equity fund, it is important to do your research and understand the investment risks involved. You can also consult your financial advisor.