SEBI (Stock Exchange Board of India) has recently re-categorised mutual fund investments into 10 different types in order to eliminate ambiguity. A mutual fund scheme that primarily invests in stocks is known as equity fund. It has various categories divided in accordance with the risk appetite of several investors. They are also subject to the market capitalisation of various stocks and the financial goals of the investors.
To bring uniformity among the AMCs (Asset Management Companies), the board now defines large-caps to be top of the 100 organisations based on market capitalisation. The stocks positioned between 101 and 250 are categorised under mid-cap, again, subject to market capitalisation. The remaining are all under the small-cap category.
For new or seasoned investors looking to invest or re-shuffle their portfolio, below is a list of 10 equity mutual fund categories to invest in. Any investor looking to invest in mutual fund investments should consider using mutual fund calculator as it helps in choosing the best fund available.
- Large-Cap Equity Funds –Large-Cap Equity Funds invests majorly in different organisations with large market capitalisation. The investors who aim at making long-term investments with sustainable returns can opt for this investment category. These are comparatively less volatile and involve less risk at the same time. As per the new mandate, the minimum investment in large-cap equity funds must be 80 percent of the total investment in the scheme.
- Large and Mid-Cap Funds –This is a brand new category recently introduced by SEBI. As it is clear by the fund category name, these schemes invest in both large and mid-cap However, the threshold of investment in both large and mid-cap funds is 35 percent each.
- Mid-Cap Equity Funds –This category of equity funds invests in Mid-size organisations. These investments involve more risk as compared to large-cap stocksand less risk than small-cap stocks. The market capitalisation of such a mutual fund investment is lower than large-cap stocks and greater than small-cap stocks. The investors who seek high growth should preferably invest in mid-size stocks. However, the threshold of investment in mid-cap equity funds is 65 percent of the total investment in the scheme.
- Small-Cap Equity Funds –This category of equity funds invests in organisations with small market capitalisation (i.e. less than Rs. 100 crores). A mutual fund investment in small-cap stocks is more volatile as compared to both large-cap and mid-cap stocks, as these underperform when the economy faces a slowdown. The threshold of investment in small-cap equity funds is 65 percent of the total investment in the scheme.
- Multi-Cap or Diversified Equity Funds – This category of equity funds invested across the market, regardless of the sector or size of the organisation. Such an investment brings the goodness of diversification and is specifically meant for investors seeking a wide market exposure. This results in balanced risk since the investments are in all three, large, mid and small-cap, stocks.
- Value Funds –This category of equity funds gives flexibility to the fund managers to invest money in the stocks that are undervalued. The primary focus is on the funds that are available at a discounted price. Although this mutual fund investment involves a higher risk, it can offer a proposition of better risk and reward, typically when the market is high. However, the investor needs to maintain a minimum 65 percent allocation to equities.
- Dividend Yield –This is another brand new category introduced by SEBI with the objective to invest in stocks that yield periodic dividend or dividend-yielding stocks. However, the fund manager needs to invest 65 to 80 percent of the capital in dividend-yielding stocks, typically higher than the average yield.
- Focused – These funds primarily focus on a fixed number of stocks in a fixed number of sectors. The objective of this scheme is to invest in not more than 30 stocks. This certainly is a good way to diversify the equity investment. However, a minimum of 80 percent of the investment needs to be in equities.
- Contra Funds – In case of investment in Contra Funds, a type of equity funds, the fund manager bets against the prevailing market trends and invests money in either currently under-performing or non-performing assets. However, a minimum of 65 percent of the investment needs to be in equities.
- Equity Linked Saving Scheme (ELSS) –This type of equity investments can be either open-ended or close-ended and is mostly in equity or equity-related. The invested amount qualifies for tax deduction under section 80C of the Income Tax Act. However, there is a fixed lock-in period of 3 years. Also, the returns are often inflation-adjusted at maturity.
Choosing the best equity mutual fund to get the maximum returns is certainly a tedious task for both new and existing investors. A Mutual fund calculator can be of great help as some of these funds involve a high risk.