Mutual Funds (MFs) help unlock the potential for diverse asset exposure, like Equity.

But, amidst 100s of Equity schemes, how do you make investment decisions?

In this blog, we delve into the nuances of equity mutual funds, like the various types and suitability for different investor risk profiles.

What are Equity Mutual Funds?

These funds pool money from various investors and invest in equities or equity-related securities as per the mandate.

The fund manager, in turn, receives a fee for managing the pool of money called the Expense Ratio.

In India, as per SEBI regulations, Equity MFs must invest at least 65% of their assets in equities or related instruments.

So, how are Equity MFs classified?

• Based on Market Capitalization
• Based on Investment Style

Based on Market Capitalization

• Large
• Mid
• Small
• Large and Mid-Cap
• Flexi Cap/ Multi-Cap
• Sectoral/ Thematic

Let’s find out below what each of them means as per SEBI guidelines.

Large Cap funds

These funds invest in companies ranked between 1-100 in terms of market capitalization.

They are generally less volatile than all other equity funds.

These may be suitable for new investors and those looking for low volatility.

Mid-Cap Funds

These funds invest in companies ranked between 101-250 in terms of market capitalization.

They are riskier than large-cap funds but offer the potential for higher returns.

These may be suitable for individuals with a higher risk profile.

Large and Mid-Cap Funds

These funds can invest in both Large and Mid-Cap companies while maintaining a 35% allocation to each.

These may be suitable for someone looking to minimize risk and seeking higher returns.

Small-Cap Funds

These funds invest in companies ranking below 250 in terms of market capitalization.

They are the riskiest equity funds but may have the potential for higher returns.

These may be suitable for someone with a high-risk profile and a longer time horizon.

Flexi-Cap/ Multi-Cap Funds

These funds invest across market caps, i.e. large, mid and small-cap.

The risk is generally diversified so they may be suitable for investors looking to contain the risk in the portfolio.

Sectoral/ Thematic Funds

These funds invest in a particular sector, like the IT sector/banking sector.

They can carry very high risk & the entry/exit must be watched out for.

These may be suitable for those with a very high-risk appetite & understanding of market cycles.

Based on Investment Style

Passive Funds

These MFs generally mimic an index like the Nifty or the Sensex.

They do not have any active fund managers and follow the index’s composition changes.

Hence, the expense ratio is generally very low in passive funds.

Active Funds

Here, there is an active fund manager who manages your investment.

Through his own analysis, the fund manager will try to buy/sell shares and aim to generate higher returns than the market.

Hence, active funds charge a higher expense ratio.

Conclusion

While choosing equity mutual funds, remember to match your goals, risk tolerance, and timeframe to the funds’ strategy.

Research well, diversify, and consult financial advisors when needed for a successful investment journey!