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What is equity fund?

A mutual fund investment scheme that primarily invests in shares of companies is called an equity fund. These companies would be of different market capitalization. As per SEBI, an equity mutual fund scheme must invest atleast 65% of the scheme’s assets in equities or equity related instruments. Equity funds, generally offer better returns than debt funds or fixed deposits over a longer period of time. The performance of an equity mutual fund depends on the financial results (either profit or loss) of the companies which it has invested in. This performance determines how much returns can an investor gain on her holdings.

Types of equity funds

Large Cap Funds

Large Cap funds invest in well established firms with large market capitalization. Large cap funds are therefore comparatively stable and reliable.

Mid Cap Funds

Mid cap mutual funds invest in mid sized companies, with medium market capitalization, generally above Rs.5000 crores and less than Rs.20000 crores.

Small Cap Funds

Small cap funds invest in companies whose market capitalization is relatively small but is poised to experience stellar growth.

Sector Funds

Sector funds invest in companies belonging to specific sectors.For example, a banking sector mutual fund will invest only in shares of companies from the banking sector. Thematic funds invest in firms or industries that are united by a theme. Theme based funds are risky and therefore suitable for informed investors.

Multi Cap Funds or Diversified Funds

Mid, small and micro-cap funds are fairly volatile. Mutual funds which create a portfolio of companies across market capitalization (large cap, mid cap, small and micro-cap) and sectors are called multi-cap funds or Diversified Funds.

Benefits of Investing in Equity Funds

  • Handsome returns

    Over a longer term, equity funds offer inflation and index beating returns

  • Start small investments

    One can start investing an amount as low as Rs. 500 per month

  • Variety of options

    Depending on one’s risk appetite, an investor can choose from the plethora of equity funds which are available

  • Tax benefits

    Certain equity funds like ELSS Tax Saving Funds offer tax benefits under Section 80C