Quantum Direct Investor Information Initiative

What are Equity Mutual Funds and its Type? Thursday, Jan 23, 2020

Equity Mutual Funds have an objective to generate capital appreciation over the long term. Such mutual funds normally invest a major part of their corpus in equities. Naturally, equity funds have comparatively high risks.

Therefore from a suitability standpoint, only if you have the stomach for high risk and an investment time horizon of at least 5 years, own them in your portfolio.

Note that equity-oriented mutual funds are most suitable to plan long-term goals such as children’s education needs, their wedding expenses, and your own retirement.

As per the capital market regulator’s diktat on mutual fund re-categorization, there are 10 sub-categories of equity mutual funds:

1) Large-cap Fund – A large-cap fund is required to invest a minimum of 80% in equity & equity related instruments of large-cap stocks (i.e. first 100 companies on full market capitalisation basis).

Suitability: So, if you are looking at growth and stability with exposure to blue-chips and predominantly larger companies while you seek capital appreciation, this sub-category of equity fund can be apt. When the equity markets turn turbulent, a pure large cap fund can arrest the downside risk better compared to their pure mid-cap counterparts and even large & mid-cap peers. Having said that, your investment time horizon should be at least 5 years.

2) Large & Mid-cap Fund – A large & mid-cap fund, as characterised by SEBI, is required to invest minimum 35% investment in equity & equity related instruments of large-cap companies and simultaneously maintain minimum 35% allocation to mid-cap stocks (i.e. companies from 101st to 250th on full market capitalisation basis). The remaining portion is parked in debt & money market instrument.

Suitability: When you plan for long-term goals and want the stability of large-caps along with the agility of mid-caps in the journey of wealth creation and accomplishing financial goals; a large & mid-cap fund could be an appropriate fit. But again, your time horizon should be at least 5 years.

3) Midcap Fund – A mid-cap fund, as the name suggests and as defined by the regulator, invests a minimum 65% of its total assets in mid-cap stocks (i.e. companies from 101st to 250th on full market capitalisation basis).

Suitability:Mid-cap funds offer you the potential to generate significant wealth. However, do note that the risk is substantially magnified.

During bull phases, mid-cap funds tend to outperform their pure large-caps and even large & mid-cap peers by a significant margin. Conversely, in the bear periods, they also have a tendency to plunge more.

Hence, invest only if you have the stomach for very high and have a fairly long investment time horizon of at least 5-7 years.

4) Small-cap Fund – A small-cap invests a minimum 65% of its total assets in equity & equity related instruments of small cap companies. (i.e. companies that are 251st onwards on a market capitalization basis). Small-cap stocks, due to their size, usually have a low trading volume. Thus note that the risk associated with small-cap funds is greater than mid-cap funds.

Suitability: Small-cap funds have the tendency to go from thrilling highs to dangerous lows. Therefore, as an investor, you need to be wary of high volatility and have the appetite for very high risk. If you are looking to boost your long-term returns where your investment time horizon is over 10 years, you may consider investing some portion in a small-cap fund/s.

5) Multi-cap Fund – A Multi-cap Fund invests across the large-cap, mid-cap, small-cap stocks with a minimum 65% investment in equity & equity related instruments. So, you get the best of both worlds --- the high-return potential of mid-caps and stability of large-caps. Usually, multi-caps funds maintain a stable allocation to large-cap and mid-cap stocks.

Suitability: On the risk-return spectrum, multi-cap funds usually falls between large-cap funds and mid-cap and small-cap funds. Hence, if you are willing to take high risk and want to enjoy capital appreciation across market capitalisation segments, a multi-cap fund may be appropriate for an investment time horizon of at least 5 years.

6) Dividend Yield Fund – A dividend yield fund as characterised by SEBI, should predominantly be investing in dividend yielding stocks and hold a minimum 65% investment in equities. These funds usually invest in companies that report robust earnings and have a history of declaring appealing dividends. Note that such companies are always on the investment radar of many value investors.

Suitability: Since dividend history is a true measure of ascertaining the true worth of the company (in midst of all business cycles and volatility of the equity markets), dividend yield funds may be worth if you are looking to safeguard against extreme volatility. But remember, you need to have an appetite for high risk and an investment time horizon of at least 5 years.

7) Value/Contra Fund – A value fund/ contra fund follow a defined style of investing, namely value and contra, and maintain minimum 65% investment in equity & equity related instruments.

Value investing involves identifying fundamentally sound stocks that are trading at a discount to their fair value.

Fund managers adopt different approaches to value investing. So, value investing finds its place in the profound quote, “Beauty lies in the eyes of the beholder” by the Greek philosopher, Plato.

Contra funds follow to adopt a contrarian style of investing and are an alternative provided by the regulator to Value Funds. This means, a fund house can have either a Value Fund or Contra Fund, but not both.

Suitability: Value and contra funds are suitable for investors are a high-risk profile and whose investment horizon is at least 5 years. On the risk-return spectrum, they are notch above dividend yields funds.

8) Focused Fund – These funds limit the maximum number of stocks in the portfolio (to a maximum of 30), and invest a minimum 65% of its assets in equity & equity related instruments. So, the fund manager holds a conviction-oriented portfolio in order to enhance returns.

Suitability: Focused equity funds expose you to concentration risk. The fund on the risk-return spectrum is placed higher, just a mark below mid cap and small cap funds. Hence, invest in a focused fund if you have the stomach for high risk and an investment time horizon of at least 5 years.

9) Sectoral/Thematic Fund – Sector and Thematic Funds have a mandate to invest is respective sector or a theme, viz. pharma, banking & financial services, pharma & healthcare as per the view formed and opportunities for the sector or theme.

Suitability: The fortune of a sector and thematic funds is closely linked to the fortune of the underlying theme or a sector. Thus, the portfolio concentration makes them a very high risk-high return investment proposition vis-à-vis diversified equity funds invest that hold the mandate to invest across sectors and various market capitalizations (whereby the risk is reduced). Sector/thematic funds are not for the faint-hearted. They are placed at the top on the risk-return spectrum.

10) ELSS (Equity Linked Savings Scheme) – ELSS (also known as tax saving funds) is basically a diversified equity fund. Investments in ELSS are subject to a lock-in period of 3 years and eligible for a deduction (upto Rs 1.5 lakh p.a.) under Section 80C of the Income Tax Act, 1961.

Suitability: If you are a risk taker, then ELSS is a promising investment avenue for tax planning. But your investment time horizon should ideally be at least 5 year when you invest in them.


Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.