How many types are there and what are the risk-returns of different types of equity funds?Asked
Equity mutual fund Invest most of the money gather from investors into stock market. The risk level in equity mutual funds are quite high and investors are advice to invest in these funds as per their risk appetite.
Types of equity funds:
Large cap funds:
Mid cap funds:
Small cap funds:
Sector Mutual Funds:
Equity Linked Savings Scheme (ELSS):
There are six categories of equity funds:
1) Large Cap Mutual Funds- These invest primarily in large companies and therefore are a safer investment in comparison to others. Such companies have capital worth 20,000 crores or more. Large companies are more stable and therefore more trusted compared to all other businesses in the market and the funds that invest in these companies tend to provide stable returns. Returns from large cap funds are taxed at 15 percent if sold before one year of investment and none post one year. To summarise, such funds are suitable for investors who have a low risk appetite and want stable returns.
2) Mid Cap Mutual Funds- These funds make investment in middle size companies. These are considered to be riskier than large cap funds. However, these funds also provide the opportunity to grow very fast. Mid cap funds are suitable for investors who are willing to take risk. However, they should take into consideration the fact that mid cap funds are highly volatile and could become a reason for loss if invested for a shorter period. Returns from mid cap funds are taxed at 15 percent if sold before one year of investment and no tax post one year.
3) Small Cap Mutual Funds- These funds invest in companies that are very small but have a potential for growth. Small Cap fund are considered to be riskier than large and mid cap mutual funds as there is a high chance of such companies not being able to manage its operations properly. However, sometimes new and innovative ideas work out and turn into successful companies. Returns from small cap funds are taxed at 15 percent if sold before one year of investment and zero after one year. Such funds can be clubbed with low risk, low return funds to average out portfolio risk and return.
4) Sector Mutual Funds- Sector Mutual Funds invest in companies in a particular area or theme like banking, PSU, infra, rural, etc. Hence, these funds are riskier than the well diversified ones. These are more volatile due to holdings in one particular sector. Sector funds are best when there are high chances that a particular area is going to get great gains in the coming year. For instance, the infra sector is performing well on the market these days and hence providing good returns to the investors of infra sector funds. To summarise, sector mutual funds can give huge returns if the investor is aware of the market trend in each area.
5) Multi Cap Mutual Funds- Multi Cap funds are the type of mutual funds that are commonly known for investing across different segments of companies categorized into small, mid and large caps. Equity Multi Cap funds are also known as diversified funds and are suitable for first time investors as they prefer to get good returns with average risk. Equity Multi Cap funds are relatively less risky compared to a pure mid cap or small cap funds as the risk is distributed well over the market. The returns from multi cap funds are taxed at 15 per cent if sold before one year and post this period no tax is imposed on profits.
6) Index Mutual Funds- Index funds are investment funds that are created to replicate the performance of market benchmark or index. Index funds behave like a market index tracker and invest in the same ratio as a particular index such as Nifty, Sensex, etc. These funds provide lower turnover along with a lower expense ratio. Therefore, index mutual funds are suitable for investors who are looking for a safe side of investment which mimics the returns of the market index. These funds are not meant to beat the market but achieve the same gains as the market.
An equity fund is a fund which invests mainly in stock markets. The major chunk of the fund is invested in stocks of companies. It is also known as stock fund. Equity funds can be categorized into different types on the basis of market capitalization, sectors, investment objectives, etc.
Types of Equity funds:
Large Cap Equity funds: When mutual fund invest large portion of the capital in companies having large market capitalization, these funds are called Large Cap equity funds. These funds provide sustainable returns and stability to investors.
Mid- Cap Equity funds: Here, the mutual fund invest in stocks of mid size companies. These funds provide moderate risk to investors.
Small Cap Equity funds: In these types of funds, fund manager invests major portion of the investors’ money in stocks of companies having low market capitalization.
Multi Cap Equity funds: These funds are used to minimize the risk and diversify the investment. In these funds, capital is invested in companies across different sectors.
Thematic Equity funds: When mutual fund invests in stocks of companies in specific sector such as Banking, IT, Pharmaceuticals, etc., these funds are called thematic or sector equity funds. The performance of these funds depends on the performance of a single sector. These funds provide high risk and returns to investors.
Balanced funds: In these funds, major part is invested in stocks but a certain part of money is invested in debt securities to limit the risks. These funds are known as hybrid funds. They are considered ideal for first time investors who want to invest in stock market and at the same time keeping the overall risk level low.
Equity Linked Savings Scheme: These funds provide tax savings to the investors and hence most popular among them. But these funds have a lock-in period of 3 years. Investors cannot redeem their money before the maturity date.
Equity funds are more risky in comparison to debt mutual funds but they can provide relatively higher returns to the investors.