Types of Equity Mutual Funds

The objective of any equity fund would be the medium-to-long-term capital gains. Based on the type of equity fund, the objective, portfolio and risk/reward ratio differs from moderate to high. Investors need to understand the investment objective of the fund, the portfolio of investments and the risk/reward ratio before investing in any Mutual Fund.

Diversified Equity Funds:

These are the most popular schemes among investors. As the name suggests, these funds invest in stocks across various sectors. The freedom to change the portfolios based on the market dynamics makes the diversified Equity Funds a good proxy to the Stock Market. This is a good option for first time investors as well as someone who is looking for general equities exposure.

The main objective of Diversified Funds is to outperform the market represented by indices such as Sensex, Nifty etc. To achieve this objective the portfolio of the fund is very actively managed as they are governed by fewer rules than other fund types. However, because of the high flexibility in its operations, at times increases may lead to concentration of investments into a specific stock/ sector. Because of this, we see some of the diversified funds outperforming the benchmark indices while some of them underperform the benchmark indices. Hence, investors need to choose diversified funds based on their past record and the pedigree of the fund houses.

Equity Linked Savings Schemes (ELSS):

ELSS are Diversified Equity Funds with income and tax benefits. Investments into ELSS can be exempted from tax upto a maximumof Rs. 1 lakh under Section 80C along with all other 80C instruments put together. ELSS comes with a least lock-in of 3 years when compared to other debt – based 80 C instruments such as PPF, NC, FD. Unlike debt-based 80C instruments, stocks don’t assure returns but they have the history and the potential to deliver higher returns.

Index Funds:

These are diversified Equity Funds whose portfolio mirrors an index such as Sensex, Nifty, etc both in the choice of stocks as well as their percentage of holding at all times. The NAV of an index fund virtually moves in line with the index fund it follows. Thus a rise of 5% in the index such as Nifty would also witness an approximate rise of 5% in a nifty-linked-index fund. Although, the index funds aim to mimic the index, their returns tend to be marginally lower than the index. This variation in return is termed as tracking error; which occurs due to the expense ratio which index fund has to bear. These funds are best suited for investors’ content with market returns.

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