In the financial markets, equity mutual funds offer structured access to the stock market across different risk levels and strategies.
Within this, understanding the different types of equity funds can provide you with a clear framework for how investments are managed and allocated. Equity funds are differentiated based on market capitalisation, strategy, sector focus, tax-treatment, and management style. These categories are designed to meet various financial objectives, which helps you to align these choices with your return expectations and time horizon.
Read further to find the types of equity funds, categories, strategies, and their practical investment relevance.
What are Equity mutual funds?
Equity mutual funds are a category of mutual fund schemes, which invest in company equities (shares) and instruments linked to equity, for example, ETFs, equity derivatives, and convertible bonds, of companies. In this scheme, the fund manager aims to allocate 65%+ of the capital in equities across different sectors and market capitalisation.
The equity mutual funds are curated for long-term growth. However, these can be volatile in the short run, and are suitable if you’re immune to higher risks and have a longer investment horizon.
Types of Equity Mutual Funds
Under the AMFI categorisation of equity mutual funds, they are classified into multiple categories based on how and where the money is invested, the strategy followed, and taxation rules, for the investors to understand the structure, risk, and objective of each fund.
Investment Strategy – based Categorisation:
Under this categorisation, equity mutual funds are categorised based on sectors, allocation focus, and valuation. Let’s discuss what they are!
Thematic or Sectoral Funds
Thematic or sectoral funds invest a minimum of 80% in the stocks of a specific sector, such as banking, technology, or pharmaceuticals, or follow a theme like infrastructure or consumption. In this approach, since the allocation is concentrated and the performance is linked to that particular sector or theme, it makes returns more dependent on sector cycles rather than the overall market movement.
Focused Equity Fund
A focused equity fund includes a small number of stocks, a maximum of 30 companies, with a minimum 65% in equities and equity-related assets. The portfolio is intentionally limited to select stocks that the fund manager believes have strong prospects. While this allows strong positioning, it also means that the performance of these stocks has a greater impact on returns.
Contra Equity Fund
Contra funds follow a contrarian approach by investing a minimum of 65% in stocks that are not in current market favour and may be underpriced. The strategy assumes that such stocks may recover over time as market perception changes. It would require time and patience, as the turnaround in such stocks may not be immediate.
Market Capitalisation – based Categorisation
Some of the equity mutual fund schemes might choose to invest based on market capitalisation only. Therefore, here’s what it is:
Large-cap funds
Large-cap funds are primarily focused on well-established companies, for example, the ‘Top 100’ by market capitalisation, with a minimum 80% allocation in large-cap stocks. These companies have stable business models and consistent earnings, which reflects in relatively lower volatility compared to other equity fund categories.
Mid-cap funds
Mid-cap mutual funds are focused on the stocks of companies that are positioned between large and small firms in terms of size, with a minimum 65% investments. These businesses have growth potential, and the returns can be higher compared to large-cap funds, though accompanied by price fluctuations.
Small-cap funds
Small-cap funds invest a minimum 65% in small-cap company shares that are in the beginning stage of developing their business and market presence. While they offer significant growth potential, they also carry higher volatility due to limited track records and sensitivity to market conditions.
Multi-cap funds
Multi-cap funds allocate around 65% to 75% to companies classified under different market capitalisation segments. The fund’s allocation may be revised over time in response to market changes and its stated objective, allowing it to remain adaptable.
Tax Treatment – Based Categorisation
Now, among equity funds, certain schemes are structured to provide Section 80C tax benefits under the Income Tax Act, as outlined below:
Equity Linked Savings Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) is an equity fund category that offers Section 80C deductions of up to ₹1,50,000, with a minimum 80% allocation in stocks. These funds also come with a mandatory lock-in period of 3 years, which qualifies them for LTCG taxation at the rate of 12.5% without indexation as of 23 July 2023.
Non-Tax Saving Equity Funds
All the other equity mutual funds, other than ELSS, are ‘non-tax saving schemes’. While they do not offer deductions under Section 80C, they provide liquidity without a lock-in period, and returns are taxed based on capital gains rules applicable to equity investment.
Investment Style-based Categorisation:
Active Funds
Active funds are proactively managed by the mutual fund house, which involves stock selection and capital allocation based on research, market outlook, and companies’ strategy. These funds’ aim is to outperform the market or a benchmark index through selective investment decisions.
Passive Funds
Passive funds follow the predefined structure of indices such as the Nifty 50 or Sensex. Instead of selecting stocks actively, these funds replicate the composition of the index, resulting in performance that = mirrors the market.
Conclusion
Investing in equity mutual funds is more than just market participation. The real strength of these funds lies in the way they are structured across categories, each serving a distinct purpose.
Whether it is stability through large-cap funds, growth through mid and small caps, or targeted bets through sectoral funds, the choice depends on how well the fund aligns with your financial direction.
Therefore, an understanding of these categories will allow you to build portfolios that are not only diversified but also intentional in your design.
FAQs
As per AMFI, the 4 major types of mutual funds are equity funds, debt funds, hybrid funds, and solution-oriented funds. Equity funds invest in shares, debt funds focus on fixed-income instruments, hybrid funds combine both equity and debt, while solution-oriented funds are designed for specific goals such as retirement or children’s education.
An equity fund is a mutual fund scheme that primarily invests in shares and equity-related instruments. These funds are designed for capital appreciation over the long term and allocate 65% to 80% of their portfolio to equities. They are suitable for investors with a higher risk tolerance and a longer investment horizon.
