Equity Funds

An Equity Fund is a mutual fund that invests in stocks of various Companies.. It can be actively or passively (index fund) managed. Equity funds are also known as stock funds.

Following are the benefits of Equity Funds:

• Equity funds are an ideal investment option for small investors who want higher returns and are ready to take risk associated with the equity market. The benefits  for small investors are: low risk (as compared to buying an individual stock), small capital for investment and diversified portfolio.
• According to Nifty returns of past 15 years, Indian stock market has returned about 16% on an average in terms of increase in share prices or capital appreciation each year.
• With so many options to choose from , Equity Funds are prefered investment option for many investors.
  
   In Equity Funds, fund manager  invest in the shares of different companies. There is a dedicated fund manager for each fund and his job is to offer great returns by spreading investment across companies from different sectors or with varying market capitalizations. Equity funds are known to generate better returns than term deposits or debt-based funds. There is an amount of risk associated with these funds since their performance depends on various market conditions and performance of companies choosen by the Fund Manager. 

Types of Equity Mutual Funds?

There are various ways of categorizing equity funds. Here is a look at the different categorizations:

Investment Strategy-based Categorization

• Theme and Sectoral Funds – These funds focus on specific investmnt themes ike an international stock theme or emerging market theme, etc. Some schemes  invest in a particular sector of the market like Power, FMCG, BFSI, IT, Pharmaceutical, etc. Sector or theme-based funds carry a higher risk since they focus on a specific sector or theme and performance of the fund is dependent on the companies chosen under these sector and themes.
• Focused Equity Fund – As the name suggests these funds focus on limited stocks which can go maximum upto 30 stocks of companies having market capitalization as specified at the time of the launch of the scheme.
• Contra Equity Fund –  Fund Manager of Contra Equity Fund analyze the market to find under-performing stocks and purchase them at low prices under the assumption that these stocks will recover in the long term. If stocks under these fund performs as per the forecast of fund manager then investor can get higher returns or vice versa. 

Market Capitalization-based Categorization
Some Fund Managers decide to invest in companies with specific market capitalizations only. Here are the common types:

• Large-Cap Funds – Fund Manager of Large Cap funds typically invest a minimum of 80% of their total assets in equity shares of large-cap companies (the top 100 companies listed on the exchange). These schemes are considered to be more stable than the other categorization of funds like mid-cap or small-cap focused funds.
• Mid-Cap Funds – Under Mip Cap funds, Fund Manager invests around 65% of their total assets in equity shares of mid-cap companies (101-250th placed companies according to market capitalization). These schemes tend to offer better returns than the large-cap schemes but are also more volatile in nature than Large cap funds.
• Small-Cap Funds – As the name suggests, in Small Cap funds fund manager invest around 65% of their total assets in equity shares of small-cap companies (251st and below placed companies according to market capitalization). This list is huge as more than 95% of all companies in India fall into this category. These schemes tend to offer higher returns than the large-cap and mid-cap schemes but are also highly volatile. Investors should ready the offer document carefully before investing. 
• Multi-Cap Funds – Multi Cap funds are amalgamation of all the above funds as fund manager usually invest around 65% of their total assets in equity shares of large-cap, mid-cap and small-cap companies in varying proportions. The fund manager keeps rebalancing the portfolio to match the market and economic conditions as well as the investment objective of the scheme.
• Large and Mid-Cap Funds – which usually invest around 35% of their total assets in equity shares of mid-cap companies and 35% in large-cap companies. These schemes offer a great blend of lower volatility and better returns.

Tax Treatment – Based Categorization

• Equity Linked Savings Scheme (ELSS) – ELSS Funds is the only option under equity scheme which offers tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. These schemes invest a minimum of 80% of its total assets in equity and equity related instruments. Further, these schemes have a lock-in period of 3 years.
• Non-Tax Saving Equity Funds – Except ELSS, all other Equity Funds are non-tax saving schemes. This means that the returns are subject to capital gains tax.

Investment Style-based Categorization

• Active Funds – These funds are actively managed by the fund managers who handpick the stocks that they want to invest in.
• Passive Funds – These funds usually mirror a market index or segment which determines the list of stock that the scheme will invest in. In these schemes, the fund manager doesn't play an active role in the selection of the stocks and hence expenses are the least in these funds.