Mutual Funds (MFs), as an investment opportunity, are a very important part of an investor's portfolio. In mutual funds, money can be parked using both Systematic Investment Plans (SIPs) or lump-sum investment options.

Live TV

Loading...

In SIP mode, investors are required to invest a small amount of money in a disciplined way, while in lump-sum investment, they can put the fund in one go at the start of the investment cycle.

There are various types of mutual fund categories available in the market that allow investors to choose a scheme based on the risk they are willing to take, the goals and amount available:

Here are the types of equity mutual funds based on investment strategy, according to Harsh Jain, co-founder and chief operating officer, Groww:

Sector and Theme-based equity funds

The fund manager of an equity mutual fund might decide to invest based on a specific theme like emerging markets, international stocks, etc. This means that the fund manager will select stocks that fall in line with the theme.

While other factors might be considered to draw a final list of stocks, the theme would remain the same.

Also read: Are you equity mutual fund investment-ready? Here's your checklist

Also, the fund manager can choose to invest in a specific sector of the economy like banking, IT, pharmaceuticals, etc. In such cases, stocks are selected from the specified sector(s). It is important to remember that sector/theme-based schemes tend to carry higher risks since the exposure is focused.

Focused equity funds

These are equity funds that invest in a maximum of 30 stocks. Also, one stock does not contribute to more than 10 percent of the portfolio. Usually, the fund manager of such schemes picks stocks based on their growth potential regardless of the industry or sector they belong to. Since the maximum number of stocks is capped at 30, the risk exposure is higher than say a diversified equity fund.

Contra equity funds

The fund manager of a contra equity fund has a contrarian view of the market. The stocks purchased by these funds are underperforming or belong to a sector that is currently down. These funds surface during bear markets when many companies take a hit and stock prices plummet. This is a high-risk strategy since predicting the stocks that will perform well in the future can be very difficult.

Here are types of equity mutual funds based on market capitalisation, according to Jain:

Large-cap equity funds

These funds invest at least 80 percent of their investible corpus in stocks belonging to large-cap companies. These companies are the top-100 companies in the market.

Market capitalisation is the value of the company traded on the stock exchange and is calculated by multiplying the stock price with the number of outstanding shares. Large-cap companies are usually fundamentally strong and their stocks are considered low-risk while generating steady returns.

Also read: Here are 6 investment lessons for beginners

Mid-cap equity funds

These funds invest around 65-80 percent of their assets in mid-cap companies. These companies are ranked between 101 and 250 in the list of companies according to market capitalisation.

Small-cap equity funds

These funds invest around 65-80 percent of the investment corpus in small-cap companies. These companies are ranked below 250 in the list of companies according to market capitalisation. This is the largest part of the market with around 95 percent of the companies falling in this category.

Multi-cap equity funds

These funds invest in large, mid, and small-cap stocks in varying proportions. The fund manager chooses the stocks based on the investment objective of the scheme and rebalances the portfolio to ensure that it is in sync with the changing economic conditions.

Here are types of equity mutual funds based on investment style, according to Jain:

Active equity funds

These funds are managed actively by the fund manager. In these funds, the fund manager takes active decisions in choosing the stocks and buying/selling them to rebalance the portfolio. These funds try to beat their benchmark and usually have a high expense ratio.

Also read: 5 key ratios to consider before investing in mutual funds

Passive equity funds

Unlike active equity funds, passive funds don’t have a fund manager actively manage them. Most passive funds track a market index that determines the stocks they invest in. Since no active management is involved, these funds have a lower expense ratio compared to active funds.

Equity funds can also be classified based on the tax treatment:

ELSS

Equity Linked Savings Schemes or ELSS offer tax benefits to investors under Section 80 C. It comes with a lock-in period of 3 years.

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions

First Published:Sept 10, 2020 8:10 PM IST