The wide spectrum of equity mutual funds

If you think that all equity mutual funds are the same and one equity fund is no different from the other, think again! There is a wide spectrum of equity mutual funds that cater to different categories of investors having different kinds of financial goals, return expectations and risk appetites. The different kinds of equity mutual fund schemes are designed to cater to these varied categories of investors.

Broadly speaking, there are seven kinds of equity mutual fund schemes, viz., large-cap, mid-cap, small-cap, multi-cap, sectoral, thematic and tax saving. Let us now look at how these different equity funds match up with different categories of investors.

Large-cap fund: This fund majorly invests in stocks of companies that are large in terms of market capitalisation. The stocks of these companies are less vulnerable to market volatility, so investing in the stocks of these companies is considered less risky. Hence, the fund investing in these large cap stocks is suitable for an investor with a long term financial goal, low risk appetite and moderate return expectations.

Mid-cap fund: This fund majorly invests in stocks of companies having medium market capitalisation. The stocks of these companies are moderately vulnerable to market volatility, so these stocks present moderate levels of risk with moderate levels of returns. Therefore, investors having moderate return expectations and moderate risk appetite can invest in these funds.

Small-cap fund: This type of fund invests in stocks of companies having low market capitalisation. These stocks are vulnerable to manipulation and may beseverely impacted by market volatility. But since these companies are at the lower end of their growth curve, the potential for growth is immense and, therefore, they can deliver stellar returns. Hence, these are high risk, high return stocks and mutual funds investing in these stocks are suitable for investors who are willing to take higher risk on expectations of higher returns.

Multi-cap fund: This type of fund invests in a melange of stocks comprising of large-cap, mid-cap and small-cap companies. The risk-return trade-off will depend on the allocation of the fund towards large-cap, mid-cap and small-cap stocks, but since the investments are well-diversified, investors with moderate return expectations and moderate risk appetite can invest in these funds.

Sectoral fund: This fund invests in stocks of companies belonging to one sector, say, technology, banking, etc. This is a high risk, high gain proposition as the performance of the fund will depend on the performance of the sector. If the sector does well, the fund will do well; but if the sector puts up a poor show, so will the fund. Hence, this fund is suitable for investors with high expectations of returns and having high risk appetite.

Thematic fund: This fund invests in stocks of companies having a common theme in their businesses, viz. infrastructure, housing, etc. A particular theme may include a wide variety of companies operating in different segments of the overall theme. This is also a high risk, high gain bet as companies comprising the theme may or may not do well and, therefore, this fund is suitable for investors with high risk appetite and high return expectations.

Tax saving fund: This is usually the equity-linked savings scheme (ELSS) which provides the benefit of saving tax under Section 80C. The fund has a lock-in period of three years during which the investor cannot redeem the units. Hence, investors looking to save tax and expecting moderate returns can invest in this fund.