What are the Different Types of Equity Funds?

 

Equity funds invest in the shares of different companies. They have a higher return potential than all kinds of investments. No wonder the SEBI Mutual Fund Regulations encourage an equity mutual fund scheme to invest at least 65% of the scheme’s assets in equities and equity-related instruments. The risk characteristic depends on market capitalization and the size of the company. There are 12 equity fund categories as per SEBI and come with different risk profiles. They are also divided based on the investment style of the holdings in the portfolio and geography. The other divisions would be domestic or international. So, they can be regional, single-country funds and the broad market.
These categories are created for better product differentiation. It helps investors who are not well-versed in financial investing have a clear understanding of the risks and features. Equity mutual funds are managed by highly professional managers. The reporting requirements and transparency are mostly regulated by the federal government. Have a look at the different types of equity funds to pick the best-suited one.

Small-Cap Funds

These have exponential growth and are best suited for investors with a high-risk appetite and proper knowledge of the stock market. Small-cap stocks have less liquidity in extreme market conditions as compared to midcap and small-cap stocks.  SEBI defines small-cap companies as those that fall below the 250^th rank on the stock exchange as per their market capitalisation. These funds have a mandate to invest in at least 65% of their assets in small-cap stocks. They are ideal for aggressive investors with a long investment horizon. 

Mid-Cap Funds

This is one of the types of equity funds which are mandated to invest at least 65% of their assets in mid-cap stocks. The mid-cap company stocks are riskier than large-cap but not as risky investment instruments as small-cap. In terms of market capitalisations, they are ranked between 101 and 250. It is best suited for investors who have a moderate risk appetite. The percentage of free float shares, held by the public, in midcap is much less than large-cap stocks.

Large-Cap Funds

These are required to invest 80% of their corpus in large-cap stocks or top 100 companies by market capitalisation. They usually dominate the industry and are quite stable. Large-cap stocks tend to perform better in recessions but may underperform small-cap stocks when the economy emerges from a recession. They are less volatile than mid-cap and small-cap stocks and thus less risky.

Multi-Cap Funds

Multi-cap funds invest (25% each) in different segments of companies divided into small, mid and large caps regardless of the sector or size. These are ideal for investors who seek multiple market exposure and do not wish to stay restricted to any particular sector. Equity multi-cap funds are relatively less risky compared to pure mid-cap or small-cap funds. This is because the risk is well-distributed over the market.

Other types of equity funds are ELSS, focused funds, sectoral or thematic funds, value funds, contra funds and index mutual funds. Read the features and risk factors of each one before considering an investment.

5 Ways to Improve Your Returns on Mutual Funds

 

Generating risk-adjusted returns from mutual funds is the key goal of every investor. This is regardless of their financial goals or market conditions. The good news is that there are a few timeless rules and tips that can help you maximise the returns. For instance, you must aim to diversify the portfolio with different asset classes. It helps achieve compounding interest while reducing the impact of market volatility. A well-balanced portfolio with the right stocks and bonds also minimises the risks of loss.
There are many similar strategies to build a better corpus from a mutual fund investment. So, here's a look at how to make better money and maximise performances.

1.     Portfolio Rebalancing

This is different from portfolio diversification. Avoid relying solely on aggressive funds to get long-term returns. Know that stocks can outperform bonds and cash over the long term. You can consider 80% of stock funds and then balance the risk with 20% bond funds.  Try to remove the ‘loss-makers’ in your portfolio. Create the right mixture of debts and equity funds. Make sure every move is as per your age, financial goals and risk appetite. All of these together can help build a strong mutual fund portfolio.

2.     Pick SIP Mode

Establish a systematic investment plan at your mutual fund company in India. It helps ensure regular and disciplined savings. You can reap the benefits of the power of compounding where you earn interest on the interest in the later years of investment. Investors can start with as low as ₹500 on a monthly basis which makes it quite affordable and convenient. No SIP can generate a full-proof positive return and is subject to some market volatilities. But make sure not to stop the SIPs even if there is a market dip and remain invested.

3.     Frequent Review

Keep a track of your fund’s performance every two to three months. It helps the investment stay aligned with the current market movements. You can expect a decent return from your portfolio throughout the tenure without dramatic changes. Checking the portfolio is all the more crucial if you have short-term goals. It can spread your risks, help the investment do well for itself and boost the chances of generating the desired returns.

4.     Know the Tax Laws

You must have a clear idea of two important laws before looking for mutual funds to invest in: Long-term Capital Gains Tax (LTCG) and Short-term Capital Gains Tax (STCG). This is necessary since a tax can eat into your returns. Check the tax slabs that are active before redeeming the investment. Have a clear idea of how different mutual funds are taxed as per their type and investment holding period. Talk to a financial advisor to avoid any pitfalls.

5.     Keep it Simple

The financial market is dynamic but not complicated. Know where you are putting your money and research and analyse the instruments continuously. Try to adapt to changes and learn about your assets. These will help you stay at par or above other investors and increase the odds of seeing your portfolio bloom over time.

Mutual fund investment has the potential of offering excellent returns. But it is a good idea to educate yourself beforehand before taking the leap since it is subject to market risks.