When I think of equity mutual funds, I am transported back to my undergraduate years, when my friends and I used to set money aside for special occasions.
Everyone must be familiar with the idea of collecting funds for a certain purpose, such as making a present purchase or paying a restaurant bill. Almost all of us have engaged in similar behavior at some point, whether it was in high school or college. The idea of an equity mutual fund is comparable. Who knows how? If you're new to mutual funds, you must start by comprehending the idea behind them as well as the many categories of equity funds.
A mutual fund is a platform for investing where different investors pool their funds to pursue a similar investment objective. Each mutual fund has a fund manager who uses all of this money to invest in stocks. As the name implies, all of the investors involved in a mutual fund investment share in the profit or loss. Profit increases with investment percentage, and vice versa.
There are three basic categories into which equity funds can be divided, namely:
● Capitalization of Market
● Invention Strategies
● Tax Benefits
Equity funds based on Market Capitalization:
Some equity funds only invest in companies with a certain market capitalization. The following describes the most typical types:
Small Cap Funds: In this case, let's suppose 65% of the corpus funds are invested in small-cap firms. According to the Securities and Exchange Board of India (SEBI), these businesses have a market capitalization that places them below the 250th spot on the stock exchange. Moreover, these businesses specifically have a capitalization of under 500 crores.
Mid-Cap Funds: Here, mid-cap companies account for more than 65% of the corpus fund. Their market capitalization runs from Rs. 500 to Rs. 10,000 crores, and according to market capitalization, they are ranked 101 to 250 on the stock exchange. Even while these funds generally have positive returns, they have a larger risk than large-cap funds and are best suited for long-term investments.
Large Cap Funds: In this case, the corpus fund is invested in large-cap firms. Based on market capitalization, these businesses are among the top 100 listed companies on the stock exchange. Here, the risk factor and the potential reward are both reduced. Investors that want to play it safe would therefore benefit the most from this.
Diversified/Flexi-Cap/Multi-Cap Funds: These funds have exposure to all three of the aforementioned fund classes. This enables investors to build a diverse portfolio with only one investment. These funds have a larger risk than large-cap funds, yet not being as dangerous as pure mid-cap or pure small-cap funds. Investors searching for long-term benefits and with a modest risk tolerance can choose Flexi-cap funds.
Equity Funds Based on Tax Benefits:
In order to take advantage of tax advantages on long-term investments, investors frequently use mutual funds. The following type offers an additional tax advantage.
Equity-Linked Savings Scheme (ELSS): An equity fund of this sort allows investors to deduct taxes in proportion to the amount they invested during the relevant financial year. This is in addition to the tax breaks for long-term capital gains that equity funds are entitled to. Tax deductions of up to £150,000 may be claimed when money is invested in this scheme. The mandatory 3-year lock-in period is a drawback of this plan. Nevertheless, due to the low level of risk and moderate to high returns, this is one of the most popular types of equity mutual funds. This one is one of the first investments made by novices who intend to build their mutual fund portfolio.