What is Equity Mutual Funds and Their Types

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Equity mutual funds are one of the types of mutual funds in India, where the funds are invested in the equity share of Indian companies. Mutual funds are one of the esteemed investment instruments that help grow your wealth.

Our investments can perform better than market indices if the funds are managed by experienced professionals. Investing directly in shares of any company holds risk, knowledge, research, and so on. You just need to know how to choose mutual funds and understand how to analyze the risk ratios of any mutual funds.

A professional fund manager and a team from any AMC (Asset Management Company) will be managing the fund. It is like crowdfunding in which the invested amount grows by the risk and reward related to the market scenario. Let us get started in detail.

How Does a Equity Mutual Funds Operates?

  • Mutual Funds – In a simple explanation, collection of funds (money for investment) from all people across various geographies by an Asset Management Company (AMC), investing the total fund across various diversified shares with appropriate proportion and managed by a professional Fund Manager and his team. In return, AMC will offer the investors with UNITS based on the NAV (Net Asset Value) of the funds.
  • Since the investment is diversified across many shares, the risk will be Moderately Low and the Return will not be as seen in shares, but it will be around 12 – 16% return per annum.
  • The Mutual funds managed by the Fund manager will have a team to work in managing the stocks and portfolio management. They can be Technical, Fundamental, and Risk analysis experts.
  • Like IPO in the share market, when a new mutual fund registers under SEBI, it comes with NFO (New Fund Offering). Every Fund will start with an NFO of Rs. 10 per unit.
  • After this, according to the performance of the fund, the NAV will increase or decrease.

Note: All the mutual funds and debt funds are regularized by SEBI (SECURITIES EXCHANGE BOARD OF INDIA)

Factors to check before Investing in Equity Mutual Funds

Four parameters can be classified into two options. They are,

  1. Growth or Dividend
  2. Direct Plan or Regular Plan.

Growth or Dividend:

  • The growth option means, the stocks that your fund holds will be providing dividends every year, which will come to your fund and will add directly to NAV, so NAV value will grow along with dividend payout.
  • The dividend option means, the dividend payout of the stocks which your fund holds, will be credited into the bank account. There will be no effect of dividends in NAV.

Direct Plan or Regular Plan:

Opting for Regular and Direct plans has an impact on the expense ratio. As we have mentioned on the expense ratio associated with the mutual fund, the variety of expense ratios depends on opting Direct or Regular plan.

  • Direct Plan: When u choose a plan directly, without the help of any brokers involved, then it is classified as a Direct plan. In a direct plan, the expense ratio will be between 0.4-1.25%.
  • Regular Plan: When a fund is chosen from a distributor or broker, it is known as a Regular plan. The expense ratio associated with the regular plan is 1.5-2.5%.

Note: Always go for a Direct plan, a higher expense ratio will impact on overall returns of your fund.

Who Can Invest in Equity Mutual Funds?

  • One who has time to analyze the share market, but completely should understand that equity is going to yield him more than 12% interest per annum.
  • Looking at investments beats inflation in the long run.
  • Who sets a goal and gives time to maturity.
  • One who looks for investments with a few hundred or thousands every month.
  • One who cannot diversify their investment portfolio or can’t manage the risk of losing all assets at a particular investment.

Different Types of Equity Mutual Funds:

There are many types of Equity Mutual funds available in the market. We shall examine a few types of funds.

Large Cap Fund

  • The companies with a market capitalization of more than 20000 crores will fall under Large-cap companies.
  • Large-cap funds should have only the shares of these 100 Large Cap companies as diversification.
  • Since these are well-established companies, large-cap funds are considered to be the least risky fund in Mutual Funds.
  • Relatively the returns will be ranging from 12-16% per annum.

Midcap Fund:

  • The companies with market capital between 20000 – 5000 crores will fall under midcap stocks and this fund will be holding these stocks in a diversified way.
  • As these stocks that are invested in Mid Cap Funds will be the future large-cap stocks, the risk will be a little higher than large-cap funds, and the returns will be relatively the same or higher than large-cap funds ranging from 12-18% Per annum.

Small Cap Fund:

  • The companies with a market capitalization of fewer than 5000 crores fall under Small-cap funds.
  • These stocks may or may not become multi-bagger stocks in the future.
  • The risks associated with these stocks are relatively higher and also the returns will be higher ranging between 20-30% per annum in a bullish market.
  • It will be negative in a bearish market.

Hybrid Fund:

  • Hybrid funds are the funds that have both Equity funds and Debt Funds in some proportion.
  • It can be 60-40 or 70-30 depending on the Fund manager.
  • This fund is used to make risk adjustments and to yield regular income, where the returns will range from 9-10% per annum.

Sectoral Fund:

  • These funds are invested in particular sectors like Technology, FMCG, BANK, Automobiles, Pharma, etc.
  • This type of fund is associated with a higher risk.
  • This will give good returns only at a particular time. For example, due to the pandemic COVID-19, the stock market has fallen.
  • The only sector which gained is Pharma. The good advice is, not to take sectoral funds.

Index Fund:

  • An index fund is investing directly in Indian stock market indices like NIFTY 50, NIFTY NEXT 50, and SENSEX.
  • These funds act as the Indian economy stands.
  • Here, we will have some clarity on when to buy and when to withdraw the capital.
  • It gives us a decent return of 11-14% per annum.

We, as a long term investor, should not be greedy over returns. Our complete aim of investments should be low risk with a decent return of 12-16% per annum. In such a parameter, INDEX FUND and LARGE CAP FUNDS will be more appropriate for a long term investor.

Benefits for Long Term Investors in Equity Mutual Funds:

As we have mentioned earlier, our recommendation would be on Large-cap funds & Index Funds. So, we are taking an example of a Large Cap Fund – Axis Bluechip Fund – Direct – Growth.

axis blue chip fund - equity mutual funds
Image: Moneycontrol

Please refer to the graph, this is the complete performance of Axis Bluechip Fund – Direct – Growth.

  • On 14th Jan 2013, the NAV of this fund was Rs. 21.17, after 7 years of holding the investment the NAV grew to 36.27 on 17th Feb 2020 with an annual return of 16.27%.
  • 7 years is also termed as a long term investment. Still, you can hold for another 13 years to get maximum yields.
  • It is at higher par when compared with its benchmark NIFTY 50, over 7 years Axis fund yields 16.27 % per annum, whereas NIFTY 50 yields return nearly 12% per annum.

Same as stocks, in mutual funds too, we should be planning for long term investment to neutralize the risk associated and can yield a decent return of 12-16% per annum. When it comes to investing in equity (Shares & Mutual Funds), the investor should remove the greedy and fearful mindset.

Important Links:

You can take the historical data of a mutual fund from the following links

  1. Moneycontrol.com
  2. Morning Star

In the next topic, we shall discuss in detail How to choose Mutual Fund”.

This subject is completely taken from practical sense from most of the successful financial leaders and even from my mentors and myself.

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