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What are equity mutual funds in India and their different types

Equity mutual funds invest primarily in equity shares of listed companies across sectors and market capitalization segments. Equity mutual funds in India are one of the best long term investment options and ideal for long term investment planning needs like, retirement, higher education and marriage of your children or wealth creation needs etc.


But before we see what are the various type of equity mutual funds, let us read what are mutual funds in India


Type of equity funds


There are many a types of equity mutual funds which can suit the different risk profile and investment objective of the investors.


You must read what are the different types of mutual funds in India.


The type of equity mutual funds in India are as follows -


Multi cap funds


Multi cap funds are also known as diversified equity mutual funds. Multi cap mutual funds invest across various sectors and market capitalizations which ensure that the negative performance of one sector does not affect the entire portfolio and increases the possibility of making a sustainable return in the long run. Multi cap funds aim for medium to long term capital appreciation and suitable for investors with high risk profile and investment horizon of at least 5 years and above.


See which are the top performing multi-cap funds in India


Large cap funds


As the name suggests, large cap equity mutual funds invest in large cap companies which have a market capitalization of over Rs 20,000 Crores. These companies are well established with strong market share. Large cap companies are generally considered to be safer investments compared to mid and small cap companies. Large cap mutual funds are suitable for Investors with moderately high risk profile and investment horizon of at least 3 to 5 years.


Companies are categorized as large cap, mid cap and small cap, based on their relative market capitalizations. Market capitalization is simply the market value of the company, calculated by multiplying the share price of a company with the company’s total number of outstanding shares.


Bombay Stock Exchange (BSE) categorizes companies into market cap segments based on the 80 – 15 – 5 rule. In the 80 – 15 – 5 rule, companies listed on BSE are arranged in descending order of market cap (highest to lowest) and starting from the top (company with highest market cap), the largest market cap companies which cover 80% of the total market cap of all the companies listed on the BSE are categorized as large cap companies.


For example - TCS, Reliance, ONGC, ITC, HDFC Bank, ICICI Bank and Infosys etc. are typical example of large cap companies where the large cap mutual funds may invest.


See how large cap mutual funds performed in the long term


Mid cap funds


Mid and small cap equity funds invest primarily in mid-size companies across different sectors. These companies typically have a market capitalization ranging from Rs 5,000 Crores to upto Rs 20,000 Crores. Mid cap companies are less well known and therefore, perceived to be riskier than large cap companies. Mid cap equity mutual funds are suitable for Investors with high risk profile having investment horizon of 5 years or more.


We have seen above that the companies (company with highest market cap) which cover 80% of the total market cap of all the companies listed on the BSE are categorized as large cap companies. The next set of companies which cover 80 to 95% of the total market cap of all BSE listed companies are categorized as mid cap companies.


Check which are the top 10 mid cap funds in India


Small cap funds


Small cap equity mutual funds invest primarily in small cap companies across different sectors. These companies typically have a market capitalization ranging from Rs 1,000 to upto Rs5000 Crores. These companies are lesser known and therefore, perceived to be riskier than large cap and mid cap companies. Small cap equity mutual funds are suitable for Investors with high risk profile having investment horizon of minimum 5 years or more.


We have seen the categorization of different companies based on the 80 – 15 – 5 rule. The last set of companies covering 95 to 100% of total market cap of all BSE listed companies, are small cap companies.


Check how mid and small cap mutual funds have given the best SIP returns in the long term


ELSS Mutual Funds


Equity-linked Saving Schemes or ELSS Mutual Funds are essentially diversified equity mutual funds but they have lock-in period of 3 years from the date of investment as one can save taxes under Section 80C of The Income Tax Act 1961 by investing maximum Rs 150,000 in a year. ELSSMutual funds are suitable for Investors with high risk profile and investment horizon of at least 3 years.


Compared to other tax saving investment options, ELSS Mutual Funds have given the highest return in the long term and also has the least lock-in period of 3 years.


To know more about ELSS Funds do read this what are tax saving mutual funds in India


Sectoral or thematic Funds


Sectoral or thematic funds invest in companies of a single or related sector. Returns depend on the growth of the sector or the theme of the funds and if the sector does perform well, the returns can be more than that of large cap or diversified equity mutual funds. Sectoral or thematic funds carry the highest risk and thus suitable only for investors with very high risk taking ability and long term investment horizon.


Being a very high risk fund, sectoral or thematic funds should not be part of your core mutual fund portfolio and even if your risk profile is very high, you should not invest more than 10-15% of your total portfolio value into these funds.


See example of some of the sectoral fund returns –


Pharma Sector Fund returns


IT Sector Fund returns


Banking Sector Fund returns


Index Funds


Index fund invests in the basket of securities that replicates the composition of a market index, like Nifty, Sensex, Bank Nifty, CNX – 100, CNX – Midcap, Nifty - CPSE etc. Unlike diversified equity mutual funds, fund manager of an index fund do not aim to beat the benchmark index but tries to replicate returns of the index it is following. The primary objective of an index fund is to reduce the tracking error with respect to the index. Since index funds are passively managed, the expense ratios of index funds are lower than that that of the actively managed funds. Over a long investment period a difference in the expense ratios can make a substantial gain to investor’s total returns.


ETF Funds


ETF mutual Funds or Exchange Traded Funds are essentially Index Funds that are listed and traded only on the stock exchanges like stocks. ETFs enable investors to gain broad exposure to entire stock markets in different countries and specific sectors with relative ease, on a real-time basis through the stock exchange trading platform,and also at a lower cost than the usual form of investing in mutual funds.


An ETF fund is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex or a sector like banking or pharma or IT. ETFs are actually such mutual funds that you can buy and sell in real-time at a price that change throughout the day.Globally, ETFs have opened a whole new panorama of investment opportunities to retail as well as HNI investors and the same trend is emerging in India.


Now that you know what are different types of equity mutual funds in India, do read what are the advantages and disadvantages of investing in mutual funds


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