What are Equity Mutual Funds?
If you do not have the time or requisite skills to evaluate good quality stocks on your own, you can invest indirectly in stocks via equity mutual funds.
Every mutual fund scheme has a specific objective and invests in assets accordingly. Equity mutual funds invest only in stocks of various companies.
Most equity funds are created with the objective of generating long-term growth and capital appreciation. The investing horizon for equity products is also longer, given that equity as an asset class may be volatile, in the short term.
However, all equity funds are not the same and their investment objectives vary. Classification of an equity fund is based on the type of companies a fund invests in. Here is a broad category of equity funds you must be aware of:
Large-cap funds are, typically, the least risky among equity mutual funds. A large-cap equity fund invests primarily in companies that are among the least volatile as they are usually mature businesses.
Mid- and small-cap funds
These funds are riskier than the large-cap funds. They invest in smaller-sized companies that are in their growing stages. Since these companies are in their growing stages, their share prices can get volatile in an uncertain market. Their stocks typically rise more than large-cap funds in rising markets, but also usually fall more than large-cap companies in falling markets.
Diversified equity funds
These funds invest across various sectors, sizes and industries, with the objective of beating a broad equity market index. These funds feature lower risk as the benefit of diversification kicks in and are suitable for investors with long investment horizons. The underperformance of one sector or stock may be made up for by the out-performance of any one or more of the other sectors or stocks.
There are other categories of equity funds such as sector funds, thematic funds, and special situation funds. One needs to be careful while investing in sector-specific funds because if the entire sector underperforms, your fund will be badly hit.
Remember: Invest in equity mutual funds only if you can stay invested for long period of time. The longer you can stay invested, the greater will be your returns.