Know all the types of equity funds in India before investing 

The mutual fund space has a plethora of investment options to choose from. For a first time investor, making an investment decision and choosing the right mutual fund scheme can become a task in itself. Mutual funds are a preferred investment tool of millions of investors but before investing in these market linked schemes, new investors must understand the basics of mutual funds and how they function.

Equity mutual funds are one of the favorite investment avenues that have the potential to generate wealth over the long term. Today we are going to understand the different types of equity funds that are available for investing here in India.

What is an equity mutual fund?

An equity mutual fund is an open ended equity scheme that predominantly invests in equity and equity related instruments of publicly listed companies. An equity fund manager aims at outperforming its underlying benchmark by investing in a diversified portfolio of stocks and other equity related instruments of companies.

Equity mutual funds are known to generate far better capital appreciation than debt and bond funds, however, this may or may not prove to be true every time. The underlying portfolio of an equity mutual fund gets affected by the constant market vagaries which are why these market linked schemes carry very high investment risk. 

Types of equity mutual funds

SEBI has rationalized and categorized mutual funds in such a way that investors can take an informed investment decision. 

Market capitalization based categorization

SEBI has categorized a few mutual fund schemes based on their market capitalization – 

Large cap funds – Also referred to as bluechip funds, these are open ended equity schemes that predominantly invest in equity and equity related instruments of large cap companies.

Mid cap funds – Mid cap funds are open ended mutual fund schemes that invest a minimum of 65% of their investible corpus in mid cap company stocks.

Small-cap funds – These are highly volatile and offer low liquidity as compared to large caps and mid caps. Small cap funds invest in companies that are ranked beyond 250th in terms of market capitalization.

Multi cap funds – These are open ended equity schemes that invest 65% of their overall assets across market capitalization.

Flexi cap funds – A new equity mutual fund subcategory launched by SEBI where the fund must invest 25% each in large, mid, and small cap company stocks.

Large and mid cap funds – These are equity funds where the fund manager must invest a minimum of 35% each in large and mid cap companies. 

Strategy based categorization

These equity funds are categorized based on the investment approach that they follow – 

Sectoral / Thematic Funds – These are equity schemes that invest a majority of their investible corpus in a particular sector or theme. For example, pharma fund or real estate fund.

Focused fund – These equity funds must invest their entire investible corpus in a maximum of 30 companies as per the market capitalization mentioned during the launch of the scheme.

Contra funds – These funds follow a contrarian investment strategy where they invest in stocks that are deemed underperforming at the moment but have the potential to generate wealth in the near future. 

Categorization based on tax exemption

Under this category, there is only one mutual fund scheme, Equity Linked Savings Scheme. Equity Linked Savings Scheme (ELSS) is a tax-saving equity scheme that comes with a three-year lock-in and tax benefit. ELSS is a tax-saving instrument that comes under Section 80C of the Indian Income Tax Act, 1961. An investor can invest up to Rs. 1.5 lakhs per fiscal year in ELSS and seek tax exemption on the sum invested. 

Management style based categorization

Active funds – Have active fund managers who build the investment portfolio and actively trade to help the scheme achieve its investment objective.

Passive funds – Follow a passive investment strategy. For example, index funds, ETFs, etc.