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Understanding the best equity mutual fund categories for your portfolio

The journey to wealth creation is not an easy one. One needs to have patience, remain consistent with their investments, and also have a long term investment horizon. Also, financial planning is necessary since you will have to manage all your recurring expenses regularly and also ensure that you save and invest a dedicated portion of your monthly income in a lucrative scheme. 

One way to create wealth over the long term is by investing in market linked schemes like equity mutual funds. Today, we are going to discuss equity funds and the different categories which investors can consider for diversification.

What is an equity mutual fund?

An equity mutual fund is one of the most sought after mutual fund schemes in India with an AUM surmounting billions of rupees. These are market linked schemes that invest the majority of their investible corpus in equity and equity related instruments of companies publicly listed in India. As per market regulator SEBI guidelines, an equity mutual fund must invest a minimum of 80 percent of its total assets in equity and equity related instruments. Depending on the nature of the scheme and its investment objective, the fund manager may allocate the remaining 20 percent to fixed income securities. The investment objective of most debt funds is to create long term wealth. These funds have maximum exposure to the equity market making them the mutual fund scheme with the highest amount of investment risk. Although there are greater risks involved, in the long run equity mutual funds have outperformed every other conventional scheme in the past. They have the potential to offer risk adjusted returns and offer diversification by investing in a basket of stocks with growth potential.

Equity mutual fund categories

Equity mutual funds can be categorized based on the market cap they choose to dominate. If you take market capitalization into consideration, equity funds can be classified as –

Large Cap Funds – Also referred to as ‘blue chip’ funds, these funds invest in stocks of companies with large market capitalization.

Small Cap Funds – Small cap funds predominantly invest in equity and equity related instruments of small cap companies with an annual turnover of Rs. 500 crores or less.

Mid Cap Funds – Mid cap funds invest in mid cap company stocks.

Multi Cap Funds – Multi cap funds invest across market capitalization. As per SEBI mandate, these funds must have a minimum exposure of 25 percent each to mid cap, small cap, and large cap company stocks.

Flexi Cap Funds – Flexi cap funds must invest a minimum of 65 percent of their total assets in mid cap, small cap, and large cap stocks with no mandate of having a minimum exposure to either of the market caps.

Save tax with ELSS

Equity Linked Savings Scheme or ELSS is an equity scheme that comes with a tax benefit. ELSS is the only mutual fund scheme that comes under Section 80C of the Indian Income Tax Act, 1961 where investors can invest up to Rs. 1.5 lacs per fiscal year and bring down their tax liability.

Invest in foreign markets with international funds

International mutual funds invest in equity and equity related instruments of companies listed outside India. They offer diversification globally unlike other equity funds that only invest in the domestic equity markets.

Sector/Theme based equity funs

There are certain equity funds that only invest in stocks of companies sharing a common theme or belonging to the same sector as pharma, petroleum, natural gas, etc. These funds are referred to as sectoral/thematic funds.

If you are unsure about equity funds, talk to your financial advisor to make an informed investment decision.

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