Confused over the array of equity funds in the market? Not sure which one suits you? Check out this simple guide that introduces the major fund types and their benefits.
You have decided to invest in equity funds. But do you know that the term “Equity Funds” is an umbrella phrase and there are several categories of equity funds to choose from?
Worry not, here in this post; you can find all that you need to know about various classifications of equity funds. This helps you to pick the right type of fund that suits your investment goal and horizon.
Without any further delay, let’s get started.
The Major Equity Fund Types
- ELSS – Equity Linked Savings Scheme
As the name suggests, this is both an equity instrument as well as a tax-saving vehicle. ELSS funds usually have a diversified portfolio, and the fund manager invests in a variety of stocks – large, mid and small caps – across various sectors.
ELSS funds have a very short lock-in period (three years) when compared to the other tax-saving investments like PPF and NSC.
Quick Tip to Choosing ELSS Funds – Remember that the basics remain the same for all ELSS funds (lock-in period, tax benefits). What varies is the stock portfolio. Make sure to pick an ELSS fund that suits your investment profile, rather than picking one based on past performance. Look for ELSS funds that perform consistently and not just ones that show a stellar performance one year and dismal performance for other years.
- Sector-based Equity Funds
You would have guessed from the name that these funds invest in stocks from a particular sector. Some common sectors include infrastructure, healthcare, financial services, FMCG, technology and more.
While a few sector-funds have proved advantageous, remember that the risk and volatility are high when you invest in sector-based funds. This is because, if a particular sector sees a growth fail, then the majority of the companies in your investment profile are going to take a hit. This, in turn, impacts the performance of your funds negatively.
- Diversified Funds
As the name indicates, these equity funds invest across a range of sectors. Diversified funds can be further classified into:
- Large Cap Funds – The core holding of the portfolio (large portion) is invested in companies with huge market capitalisation. Usually, this includes the top 100 companies in the market. These funds are suited for investors with low-risk tolerance.
- Mid Cap Funds – The major portion of your investment portfolio includes companies with medium market capitalisation. This includes companies ranked from 100 – 250 in the market. Best suited for people with moderate risk tolerance. This is one of the most popular types of equity funds among investors.
- Small Cap Funds – Here, you invest in companies with small market capitalisation, less than 500 crores. They are highly risky and volatile. Best suited for advanced investors who have better knowledge of the stock market and high-risk tolerance.
- Balanced Funds
As the name indicates, these funds invest in both debt and equity. They are also known as hybrid funds. 65% of the portfolio is allocated to equity and the rest to debt. These are great for investors who are looking to diversify their portfolio. Alternatively, if you are looking to add debt instruments to your investment profile, but still want to enjoy higher returns, then this fund works well for you.
It provides stability along with higher returns, thereby making it one of the heavily invested equity fund.
- Index Funds
These funds use stock market indexes like Nifty or Sensex, as an investment instrument. The performance of these funds is in correlation with the performance of the corresponding index. Index funds are generally passively managed thereby the expenses associated with the fund are low.
These are just the major kinds of equity funds. There are several more. Make sure to do your homework and pick the right type of fund that suits your investment time frame and risk profile.