• HDFC securities
• 27 Mar 2023
• Knowledge Centre

 

 

Mutual funds have become a popular investment option for investors. They are classified into three main categories based on the assets they invest in, which are equity funds, debt funds, and hybrid funds. Equity funds, in particular, have various types to suit different investor preferences. This provides a broad range of investment options for investors. In this article, we will discuss the different types of equity funds available for investors to invest in.

Equity Funds based on investment style

There are two types of Equity Funds based on investment style – Active and Passive Funds.

• Active Funds are managed by a professional fund manager. The manager hand-picks assets for investment and monitors and modifies your investment portfolio whenever the necessity arises.

 

• Passive Funds are funds that track a particular market index for its returns and risk. For instance, if you pick BSE Sensex as your tracking index, your fund portfolio will replicate the stock composition and performance of the index. The fund is not actively managed by a professional fund manager.

Equity Funds based on the tax treatment

Types of equity mutual funds can be classified on the basis of tax treatment too. There are two types of funds – non-tax saving funds and Equity Linked Savings Schemes (ELSS).  

• Equity Linked Savings Schemes (ELSS) are investments that offer tax benefits under Section 80C of the Indian Income Tax Act. ELSS come with a minimum lock-in period of 3 years.

 

• All other equity schemes, except ELSS, are non-tax saving funds. You are liable to pay capital gains taxes on the returns generated by these funds.

Equity Funds based on market capitalisation

Equity funds may invest in companies with specific market capitalization. These types of equity funds are:

• A Small-cap Fund predominantly invests in small-cap company stocks. As per regulations, these funds should invest at least 65% of their corpus in small-cap company stocks.
• Mid-cap Fund invests at least 65% of its corpus in mid-cap company stocks.
• A Large-cap Fund invests at least 80% of its total assets in large-cap stocks.
• Multi-cap Fund invests in companies across market capitalisation.

Equity Funds based on investment strategy

Equity Mutual Funds types based on investment strategy are Sectoral Funds, Focused Funds, Value Funds, and Dividend Yield Funds.

• Sectoral funds are those funds that invest in stocks of a particular sector. For instance, it invests in stocks belonging to the banking and financial sector or the pharmaceutical sector.

 

• Focused Equity Funds invest in a maximum of 30 stocks. Given this, the scope of diversification is limited. This translates it as a high-risk investment option.
• Value Funds follow the value investment strategy. It buys stocks that are undervalued, hoping to make good profits as the stock price improves. It adopts the concept of margin of safety for risk minimisation.

 

• Dividend yield funds are funds that invest in dividend stocks. This allows you to earn decent dividend income and also earn better capital gains in the long run.

 

There are various types of equity funds available in the market, each with its own unique investment strategy, risk profile, and return potential. It is important to carefully evaluate the investment objective, past performance, fund management, expense ratio, and other factors before investing in any equity fund.