All you need to know about Equity Mutual Funds6 min readReading Time: 5 minutes
Equity funds have gained immense popularity amongst investors. Investing in these funds is a good way to move towards achieving financial independence through wealth creation. But before you start investing in these funds, understand the basics and its various types.
What are Equity Funds & how do these work?
Equity funds are a type of mutual funds that invest your money in equity shares of companies. The scheme is managed by a financial expert known as the fund manager. He/she takes the all-important decision of where to invest your money based on the scheme’s objective. Your overall ownership in the fund is reflected by the number of units that are allotted to you by the fund manager. You get an opportunity to invest in businesses that have the potential to grow and become bigger in the future. The gains come in the form of dividends and capital appreciation. You receive the gains in proportion to your level of investment. The value of your investment grows when the prices of the underlying equity shares increase over a period of time.
What are the different types of Equity Funds?
There are a variety of equity funds available for investment. To get better clarity, let’s divide these into a few categories as per the Securities and Exchange Board of India (SEBI) guidelines.
a. On the Basis of Market Capitalisation
In simple words, market capitalisation refers to the total market value of equity shares of a particular company. Equity funds have been classified based on the kind of equity shares they invest in. These are as follows:
Small Cap Funds: These are open-ended schemes that invest at least 65% of investors’ money in equity and equity-related instruments of small-cap companies. As per AMFI’s list of stocks, small cap stocks are those which rank from 251st onwards in terms of full market capitalisation. Small Cap Funds are considered to be riskier than Mid Cap/Large Cap Funds. At the same time, these funds carry greater potential to deliver higher returns.
Mid Cap Funds: These funds are open-ended schemes that invest at least 65% of investors’ money in equity and equity-related instruments of mid cap companies. As per AMFI’s list of stocks, mid cap stocks fall between 101 and 250th rank in terms of full market capitalisation. From a risk-return aspect, these funds fall in between Small Cap Funds and Large Cap Funds.
Large Cap Funds: These open-ended schemes invest at least 80% of the total assets in equity and equity-related instruments of large cap companies. As per AMFI’s list of stocks, large cap stocks fall between 1st and 100th rank in terms of full market capitalisation. These funds are considered to be the least risky as compared to Small Cap Funds and Mid Cap Funds.
Large and Mid Cap Funds: These open-ended schemes invest in equity and equity-related instruments of both large cap and mid cap companies. The minimum investment in large cap stocks and mid cap stocks is around 35% of the total assets respectively. From a risk-return standpoint, these funds fall in between pure Large Cap Funds and pure Mid Cap Funds.
Multi Cap Funds: These open-ended schemes invest at least 65% of the total assets in equity and equity-related instruments. Multi Cap Funds enjoy the flexibility to diversify across market capitalisations. The fund manager actively positions the portfolio to benefit from the outperforming segments of the market. Being all-weather schemes, less aggressive investors may invest in them for long term wealth creation.
b. On the basis of Investing Strategy
An investment strategy entails the method used by a fund manager to pick stocks for the portfolio. Such a strategy is aligned with the investment objective that he/she wants the fund to achieve. On the basis of investing strategy, SEBI has classified equity funds as follows:
Value Funds: These open-ended schemes invest at least 65% of the total assets in equity shares of companies. The fund manager selects stocks that are undervalued at the moment but whose prices are expected to increase significantly in the future. This strategy, also known as value investing, enables him/her to purchase more quality stocks at a cheaper valuation.
Contra Funds: These open-ended funds pursue a contrarian investment strategy and invest at least 65% of the total assets in equity shares. The fund manager may pick stocks of companies from sectors that are experiencing a slowdown at the moment. In yet another scenario, he/she may pick stocks that are available at a lower cost due to underperformance. The underlying belief is that the stock will attain its correct value once the situation stabilises in the long run.
Focused Funds: These open-ended funds invest at least 65% of the total assets in equity and equity-related instruments. The scheme focuses on a maximum of 30 stocks chosen from across sectors and industry sizes. The fund manager picks specific stocks after extensively researching about their growth prospects. It makes focused funds a high-risk high-return opportunity as compared to multi-cap funds.
Sectoral/Thematic Funds: These open-ended schemes invest at least 80% of the total assets in equity shares of a specific sector/theme. At present, the prominent sectors in the economy are banking, FMCG, infrastructure, pharmaceuticals, and technology. Similarly, other prevailing themes available for investments are dividend yield, Multinational Corporations (MNC), energy, Public Sector Undertakings (PSU) and consumption. Considering the high-risk profile of the fund, an aggressive investor may want to hold them for the medium-term.
Dividend Yield Funds: As the name suggests, these open-ended schemes invest at least 65% of the total assets in higher dividend-yielding stocks. The fund manager picks stocks of companies that have stable cash flows and the ability to pay dividends regularly. These funds are less volatile than their multi cap counterparts. Conservative investors may want to hold them as part of their core portfolio for a long term investment horizon.
ELSS Funds: These are open-ended equity-linked saving schemes which offer a tax deduction of up to Rs 1.5 Lakh under Section 80C of the Income Tax Act. The fund manager invests at least 80% of the total assets in equity and equity-related instruments. The scheme has a mandatory lock-in period of 3 years and is ideal for wealth creation over the long run.
Best Equity Funds 2020
Equity funds have earned the reputation for creating wealth for investors over the long run. You can choose from a list of funds depending on your need, risk profile and investment duration. Here are the Best Equity Funds in 2020 for you to pick from.
How to invest in Equity Funds via Paytm Money?
Investing in equity funds is a smart way to park your funds for your long term financial goals. The Paytm Money app and Paytm Money website offer only the top-rated funds for you to pick from. Here are a few steps that you need to follow to invest in these funds:
Step 1: Download the Paytm Money app to complete your KYC & become investment-ready within minutes
Step 2: You can start investing both on our website and App. On the home screen of the App, go to ‘Get Started with Mutual Funds’ and click on Equity Funds.
Step 3: On the Equity Mutual Funds’ page, select from Large Cap, Multi Cap, Mid Cap and Small Cap Funds’.
Step 4: Select a fund of your choice and ‘Invest Now’ via SIP and enter the amount of investment. Tap on ‘Proceed to Payment’.
Step 5: Make payment using Auto Pay, Netbanking or Debit Card. Tap again on ‘Proceed to Payment’ to complete the transaction.