Not all equity funds are the same, know the difference
How to choose a mutual fund? This can get tricky when you have to choose from over 11,000 schemes, which are not similar in nature. Some mutual fund schemes invest more in equity, some in debt, some in large cap stocks, some in mid-cap and small-cap stocks, some in specific sectors or themes.
In this article, we will touch upon equity funds, which majorly invest in company shares listed on stock exchanges. Technically, a fund has to invest between 65% to 100% of its assets in shares to be qualified as an equity fund. These high-risk schemes aim to make money by appreciation in stock prices and the dividends that company declares.
With innumerable options available, how do you zero down on one fund? We help you understand broad categories of equity funds, of which you can take your pick.
Equity Diversified funds:
First time equity MF investors should consider diversified funds, which invest across various stocks, sectors and market capitalisations. By diversifying the assets they reduce the risk associated with non-performance of single sector or stock.
Apart from multi-cap funds, there are some equity-diversified funds that specifically look at only blue chip companies. These large cap funds are less risky as they invest in established stocks. However, the capital appreciation of these stocks would be limited.
To allocate funds to lesser known business models and higher appreciation of stock prices one can consider Mid-cap, and small-cap equity funds. But the risk associated is higher here as these are smaller, less proven companies, many of them with low tradable volumes, higher promoter ownership.
Equity Linked Saving Scheme:
Equity-Linked Saving Schemes or ELSS are similar to diversified equity schemes. The only difference being that investments here are locked for three years as they offer tax benefit under Section 80C of Income Tax act.
Sector funds:
Once you have some diversified equity funds in the portfolio and are willing to take higher risk you can look at sectoral funds. Sectoral schemes invest in stocks of a particular sector such as technology, bank, pharmaceuticals, etc. The idea behind investing in a sector specific fund is that the particular sector will outperform the broader market during the specific time. This concentrated strategy can be risky as sectors are cyclical in nature. For instance, technology stocks were beaten down for a long period due to rupee depreciation and lower demand from US. People willing to redeem investments were stuck or had to bar losses. But today the technology sector is flourishing and hence those who invested at the lows made better returns over the long-term.
Semi diversified schemes:
Thematic Funds, Dividend yield and Contra funds are considered as semi diversified funds.
Thematic funds invest in themes such as Shariah Funds, Rural India, Infrastructure etc and may or may not invest across sectors or market capitalization. For instance funds, Rural India Themed funds would invest in agriculture, healthcare, banking and look at small as well as large companies to invest in.
Dividend yield funds invest in high-dividend paying stocks, while Contra Funds look at investing in companies or sectors that are presently undervalued and undiscovered. Emerging Equities Funds, Contra Funds etc are some of the second names of these funds.
Index Funds and ETFs:
These funds invest in stocks in the same proportion that the benchmark index holds. These are passively managed equity funds and would tend to move in tandem with the index they mirror, say Nifty 50 or Sensex. Exchange Traded Funds (ETFs) are traded on the exchanges like regular shares.
