How Are Equity Funds Categorised?

When it comes to mutual funds, most investors prefer to invest either in equity or debt funds. Equity funds are those that aim to generate higher returns. The fund manager invests in various companies with different market capitalisation. These funds are generally categorized on the basis of their investment mandate as well as the types of stocks and sectors in which investments are done. Here’s how equity mutual funds are categorised.

Categorisation as per market capitalisation

Market capitalisation is the most basic level under which equity linked funds are categorised. In fact, there are 5 sub-categories of equity linked mutual funds as per market capitalisation, which are:

  1. Small cap funds: The fund manager generally invests in smaller companies. Smaller companies are more prone to market volatility, which is why small-cap funds typically deliver fluctuating returns.
  2. Mid-cap funds: Mid cap funds are those wherein the fund manager invests in medium-sized companies. People who have a moderate risk appetite can benefit from investing in such funds.
  3. Mid and small cap funds: Your fund manager may diversify your investment in both, small and medium sized companies to ride out the risks associated with equity oriented funds and to help you earn higher returns.
  4. Multi-cap funds: Sometimes fund managers invest in a wide range of funds of all shapes and sizes, and themes and sectors, in order to make the most of market capitalisation. This is known as investing in multi-cap funds, which is ideal for investors looking to diversify their portfolio.
  5. Large cap funds: Large cap companies are those that are well-established. Investing in such companies can help you accrue stable and reliable returns on your investments. You should invest in large cap funds if you are a conservative investor with a lower risk appetite.

Categorisation as per sector and theme

Equity securities, focusing their investments on a specific sector or theme, fall under the theme and sector category. Sector funds essentially invest is specific industries such as Pharma, Technology and FMCG companies, among others. Thematic funds, on the other hand, generally follow only one specific theme or subject and the fund manager invests in accordance with that specific theme; for example, all investments are done in international stocks or consumer companies. Investments in thematic or sector equity funds are generally considered risky, since the focus of investment is the particular theme or sector. The associated risks are related to performance of the sector in general as well as the market risk. That said, you can diversify your investment via market capitalisation and mitigate your risks considerably. 

Categorisation as per investment style

All of the above mentioned equity securities basically follow an active investment style, under which your fund manager determines the portfolio composition. That said, there are certain equity mutual funds, wherein the portfolio composition imitates a given index. As such, the funds which follow a specific index are regarded as index funds. Index funds are passively-managed and investments are done in the same companies repeatedly, in equal proportions. For instance, a Sensex fund may invest in all 30 companies listed on the Sensex in equal proportions, in which the listed companies form the index. These equity securities are low-cost investments and do not require active management from the fund manager.

Final word: The great advantage of investing in equity savings scheme is that you can earn higher returns as compared to debt funds or conservative investment instruments like bank fixed deposits. The returns you earn on your investment essentially depend on how the company performs. You should consult your investment advisor before investing in these funds.

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