ARTICLES

What is an Equity mutual fund?

Equity mutual funds are those mutual funds that have a mandate to invest in shares of publicly traded companies. They invest a minimum of 65% of the corpus in equity in order to avail equity taxation. They have the potential to generate high returns. The risk is also relatively high as the investment is into market-linked equity stocks with high volatility. 

How do they work?

The performance of the fund solely depends on the share price movement. They are benchmarked against an index or multiple indices in accordance with the investment objective. The performance of the fund is also compared with the benchmark. So, when BSE Sensex or Nifty 50 rises or falls, the stock prices can also move accordingly. The ideal tenure for investing in an equity mutual fund is typically 5 years or higher.  

Who should invest?

Equity mutual funds are suitable for any investor who is looking at a tenure of at least 5 years and has a moderate to a high-risk appetite. There are various types of equity mutual funds, one may choose in accordance with the risk appetite. There is a risk associated with these funds as their performance depends on various market conditions. Equity mutual funds as a category are considered risky. 

Types of Equity mutual funds:

Market capitalization – There are 3 types of funds under this category – 

Large-Cap funds 

These funds invest in well–established, reputed companies which have a proven track record of creating wealth for their shareholders. They are of relatively lower risk as compare to mid and small-cap since they have the potential to provide comparatively stable returns. 

Mid-Cap funds 

These funds invest in medium-sized companies that have the potential to grow at a faster rate. They are also capable of becoming large-cap companies over the long haul. The risk profile is relatively moderate and such schemes are more volatile than large-cap.

Small-Cap funds 

Companies that have a market capitalization of less than Rs. 500 crore are termed as Small Cap funds. These funds are of a higher risk profile and one should be careful whilst investing in this type of equity mutual fund.  

Investment Style:

There are 2 types of funds under this category – 

Active funds 

These funds are managed actively, the positions held in the portfolio are often evaluated. Buying and selling in these funds happen very frequently. 

Passive funds 

These funds are passively managed; the portfolio does not change very often. The costs associated with these funds are comparatively lower. Passive funds track the performance of the underlying benchmark.

To know more about Active and Passive funds read our article Active vs Passive investing.

Tax implications:

Hope this note helps you as you take your initial steps into the world of mutual funds. 

Disclaimer: Investment in securities and other investment products is subject to market risks; read all the related terms and documents carefully before investing.