Equity funds aim to produce higher returns by investing in shares of various market capitalization companies. They generate higher returns than debt funds and fixed deposits. The performance of a company affects the profits of shareholders.
You can classify equity funds based on their investment objective and the stocks and sectors in which they invest.
Sector-based and thematic – This category includes equity funds that focus their investments on a specific area or subject. Sector funds are invested in a particular industry such as FMCG or a subject such as pharma or technology. Themed funds are carried forward to new retail companies or international stocks.
Because sector funds and thematic funds are based on a specific sector or theme, they are riskier. It is due to both sector and market risk due to their performance, yet, in terms of market capitalization, business and thematic funds may diversify.
Market capitalization based –
Large-cap equity funds: Generally, well-established large-cap firms make them stable and reliable investments in large-cap funds.
Mid-Cap Equity Fund: They are an investment in medium-sized companies.
Small-cap investing: Small-cap funds offer volatile returns because small companies are subject to uncertainty.
Mid-and-small-cap funds: In both mid-cap and small-cap funds, some funds invest.
Multi-cap funds: equity funds that invest in large-cap, mid-cap and small-cap stocks through market capitalization are referred to as multi-cap funds.
All the funds listed above follow an effective management strategy in which the fund manager decides on the structure of the portfolio. However, there are funds whose portfolio structure imitates a particular index.
Equity funds after the standard benchmark are called index funds. These are passively managed funds that form the parameter that the fund represents, investing in the same companies in the same proportion.
For example, in all 30 SENSEX firms, a SENSEX index fund will invest in the same proportion in which the companies are part of the index. Index funds are low-cost funds, as they do not require active management of the fund manager.
Investment benefits in equity funds
Several benefits of investing in mutual funds:
- Professional money management
- Systematic investments
- Low Cost
The main advantage of investing in an equity fund is that you do not have to think about selecting stocks or sectors to invest. Successful investment in equity requires a tremendous amount of research and knowledge. Once you invest in it, you should dig deep into the financials of a company.
You also need to understand how it is expected that a particular sector will perform in the future. All of this, of course, requires a lot of time and effort that most common investors don’t have. Therefore, the solution is to leave the stock-picking by investing in an equity fund to an experienced fund manager.
How an equity fund works:
An equity fund invests at least 60% of its capital in various percentages of companies’ equity shares. It should be combined with the investment mandate of the company. It can be purely large-cap, mid-cap, or small-cap investment or market capitalization combination. The investment style can be value-oriented or growth-oriented.
After allocating a large portion of equity shares, the remaining amount will go to debt and money market tools. It is to take care of unexpected demands for redemption and reduces the level of risk to some extent. The fund manager decides to buy or sell to take advantage of market dynamics and total returns.