All equity mutual fund schemes have the same objective - capital appreciation. That being said, not all investors have the same risk-taking ability or risk profile. Hence, the way in which different equity mutual fund schemes achieve capital appreciation varies based on the amount of risk exposure. The risk varies based on many factors and some types of equity mutual funds based on investment objective are:
These mutual fund schemes invest in companies whose market capitalization is less than $2 billion. These stocks are considered to be riskier than mid or Large Cap stocks.
These mutual fund schemes invest in companies whose market capitalization is between $2 billion and $10 billion. These stocks are considered to carry less risk than Small Cap stocks, but are riskier than Large Cap stocks.
These mutual fund schemes invest in companies whose market capitalization is over $10 billion. These stocks are considered to be the least risky investment as far as equity stock picking goes.
These funds pick the stocks of companies that function in a particular sector - like pharmaceuticals or banking.
These funds pick stocks of companies around a particular theme like infrastructure or travel.
The approach that the fund house/fund manager uses to pick the stocks to invest in is called its investment style or strategy. There are 4 primary strategies:
Also called value investing, these equity mutual fund schemes pick stocks of companies that are undervalued and expected to make a meteoric rise in the near/distant future (time-frame being dependent on the fund’s time frame). The stocks chosen are purchased at a very low valuation, enabling a lot more to be bought, and when the value spikes - are sold off or held depending on the investment mandate.
These are the most common equity mutual funds which invest in companies that are already performing well and are slated to grow and perform better in the future. The stocks and shares of these are usually at or higher than the current market valuation, and spikes in performance do provide returns, but not at the level of equity value funds.
Fund managers pick the sector according to the fund mandate, and then pick companies performing well in that sector in which to invest.
Fund managers spend time researching various companies based on their profitability and potential for growth irrespective of which economic sector or theme they belong to.
Equity funds invest up to 99% of their corpus in equities, but can also drop this allocation down to anything above 65% (while still being counted as an equity scheme). The remaining corpus is allocated toward different securities like debt or money market instruments. Also, as far as Indian income tax laws are concerned, an equity fund invests at least 65% of its corpus in equity shares of domestic companies. This means that, for income tax purposes, funds that invest in equities of international companies are considered debt funds.
Equity Linked Savings Schemes - or ELSS as they’re more popularly known - are equity mutual fund schemes which have been recognized by the Income Tax Department of India as tax-saving investment avenues. Under Section 80C of the Income Tax Act, 1961, up to Rs.1,50,000 can be exempted from taxation annually through investing in ELSS Funds.
Both these methods of investing have their benefits and drawbacks and can be further pursued here.
Among all other investments, equity fund schemes have historically been able to provide market-beating and inflation-beating returns. Most safe investments like fixed deposits, recurring deposits, etc. offer a rate of interest that provides little to no increase in money value after accounting for inflation.
Investing in an equity mutual fund scheme means that the investor will hold a huge number of stocks and shares of various companies across different business processes, themes, sectors, etc. Holding a wide variety of stocks in one’s portfolio ensures that no great losses occur which cannot be offset by gains in another part of the portfolio.
As one of the only few financial products that can provide real market and inflation-beating returns, equity mutual fund schemes are the only real option for those who wish to invest and grow their capital over the medium to long term.
The Equity Linked Savings Schemes, or ELSS as they’re commonly known, allow for up to Rs.1,50,000 to be spared from annual taxable income every year if invested in this avenue. ELSS is also the only tax saving investments under Section 80C that has provided such high historical returns - no other Section 80C has been able to match the returns generated by equity mutual funds.
Most equity mutual fund schemes are managed by professional fund managers with advice from market analysts. This live tracking on investment securities and investment opportunities allows for risk mitigation and clarifies the choice of which stocks to invest in.
Stocks and shares are traded across all major worldwide exchanges on a daily basis. While not immediately as liquid as withdrawing funds from a savings bank account, the liquidity offered is far higher than most other mutual fund schemes or investment plans.
|SCHEME NAME||1-YEAR RETURNS||3-YEARS RETURNS||5-YEARS RETURNS|
|Aditya Birla SL Frontline Equity Fund(G)||-1.17 %||13.46 %||14.54 %|
|DSP Equity Opportunities Fund-Reg(G)||-5.22 %||16.13 %||16.53 %|
|Franklin India Equity Fund(G)||-2.23 %||12.22 %||16.23 %|
|HDFC Capital Builder Value Fund(G)||-5.19 %||16.70 %||16.33 %|
|ICICI Pru Bluechip Fund(G)||0.60 %||15.91 %||14.53 %|