Know how your money is invested in equity funds

Over the past two decades, equity mutual funds have considerably grown in popularity. Despite this, there are many who are curious about the basics of equity funds and are not aware of how such funds operate. Equity funds invest your money in various companies’ stocks of distinct market capitalisations with the aim to generate inflation-beating returns over the long-term

What is an equity mutual fund?

Equity funds try to generate high returns over the long term by investing in companies’ stocks across all capitalisations. As they invest at least 65 per cent of your money in equity stocks of various companies, they hold the potential to generate higher returns than hybrid and debt mutual funds. In equity mutual funds, the companies’ performance plays a major role in determining your returns.

How do equity mutual funds work?

As mentioned above, an equity fund allocates a huge chunk of the corpus in equity stocks of distinct companies in specific proportions. This allocation depends on the equity type and alignment with the objective and goal. Based on the condition of the market, asset allocation can be in stocks of large-cap, mid-cap, and small-cap companies. After allocation based on market conditions towards equity, the rest of the amount is invested in the money market and debt instruments. Allocation towards debt is done to diversify the overall corpus, lower the risk level and prevent sudden redemptions. Note that, in equity mutual funds, fund managers take care of the selling and buying decisions to leverage the changing market conditions and gain maximum returns.

Who must invest in equity funds?

Your equity mutual fund decision must be in alignment with your risk profile, investment horizon and other crucial objectives. In case, you have a long-term financial goal, it is recommended to opt for equity mutual funds. Doing so offers your investment the much-required time to recoup against market fluctuations and movements.

How is your investment allocated in different kinds of equity funds?

While the goal of all equity mutual funds is capital appreciation, the categorisation of equity funds is based on the risk taken to attain the goal. A types of equity funds based on investment objectives are –

Large-cap equity mutual funds

Such equity funds invest in stocks of companies, ranking from 1 to 100 in terms of market capitalisation. Such funds are the least risky and allocate at least 80 per cent of investments in large-cap equity stocks.

Mid-cap equity mutual funds

Such equity funds invest in the companies’ stocks, ranging from 101 to 250 by market capitalisation. Such schemes are considered less risky as compared to small-cap funds. At least 65 per cent of investment is in mid-cap equity stocks.

Small cap equity mutual funds

Such equity funds invest in the stocks of companies with a rank of over 250 in terms of market capitalisation. Such funds are riskier than large and mid-cap equity mutual funds but can generate relatively higher returns. At least 65 per cent of investment is in small-cap equity stocks.

Multi-cap equity mutual funds

Multi-cap equity mutual funds invest in companies’ stocks across small, mid, and large-cap companies. Based on the condition of the market, fund managers determine the predominant investments. The minimum exposure of your investment to multi-cap stocks is 65 per cent.

Bottom line

Equity fund schemes pool your investment in companies’ equity stocks after thorough research. By knowing distinct equity fund types and the manner your investments are allocated across market capitalisation, you can take an informed decision about which equity mutual fund would best match your financial goal and risk appetite.