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.