Mutual fund schemes are classified in many ways and one of the ways of classification is based on their asset class. There are different kinds of funds like equities, fixed income, gold funds, etc. In this article, we will be looking into different types of equity mutual fund schemes as prescribed by the market regulator Securities and Exchange Board of India (SEBI).

Large-cap fund

It is an open ended fund where 80% of the total assets must be invested in large-cap stocks. These stocks are the top 100 stocks ranked by market capitalisation. At least 80% of the total assets should be invested in large-cap stocks.

Mid-cap fund

It is an open-ended equity scheme where 65% of the total assets should be invested in mid-cap stocks. These stocks are related to companies ranked from 101 to 250 based on the market capitalisation.

Small-cap fund

This type of fund invests the pooled money in small-cap companies and these companies are ranked from 251 based on their market capitalization. The minimum investment in equity and equity related securities must be 65% of the total assets. This is also an open-ended fund.

Multi-cap fund

Under this open-ended equity scheme, at least 75% of the total assets must be invested in equity and its related instruments. That 75% must be divided equally among large-cap stocks, mid-cap stock and small-cap stocks. This fund helps in diversification across companies of various sizes and provides broad market exposure.

Flexi-cap Fund

It is an open-ended mutual fund scheme where at least 65% of total assets must be invested in equity and equity related instruments. There is no cap that this 65% should be equally divided among large-cap, mid-cap or small-cap stocks. The remaining 35% of the total asset can be invested across debt securities, money market instruments, and fixed income derivatives.

Large and Mid-Cap Fund

These are open-ended equity mutual fund scheme where at least 35% of total assets will be invested in large-cap and mid-cap stocks each. This gives the investor exposure to both the stability of large-cap stocks and the growth opportunities present in mid-cap stocks. This category offers a balanced risk-reward profile for the investor.

Sectoral and Thematic Fund

Sector-based equity mutual fund schemes invest the money in a specific sector like banks, insurance, technology, FMCG, etc. Since a few sectors are expected to gain during different phases of economic growth, these schemes bring in the much needed balance to an investor’s portfolio and the portfolio as a whole is likely to benefit.

In thematic funds, the money is invested in company stocks based on certain themes like electric vehicles, renewable energy, data centres, etc. Both are open-ended funds and at least 80% of the total assets must be invested in equity or equity related instruments.

Value or Contra Fund

Value funds invest in company stocks that are likely to be undervalued and are available at a lesser value in the secondary market compared to its intrinsic value. By investing in undervalued stocks, the scheme expects to tap the difference in value and achieve capital appreciation.

Contra funds focus on sectors or stocks that are overlooked by the broader market. It follows a contrarian investment strategy and the scheme invests against prevailing market trend or popular market sentiments with respect to stocks or sectors.

Both these funds are an open-ended fund and at least 65% of the total asset must be invested in equities or equity related instruments.

Equity Linked Savings Scheme

In this scheme, a minimum of 80% of the total asset must be invested in equity and equity related instruments. The invested funds have a lock-in period of three years, according to the rules notified by the Ministry of Finance. The invested amount under this scheme is eligible for tax exemption under the old tax regime.

Dividend Yield Fund

A mutual fund scheme where the money pooled from investors are invested in companies that pay dividends consistently every year. At least 65% of the total asset must be invested in equities or equity related instruments that pay dividends.

Focused Fund

In this mutual fund scheme, the investments are made in just a few number of stocks up to a maximum of 30 stocks and not more than that. At least 65% of the total asset must be invested in these stocks and the scheme should clearly mention where it is plans to focus, for example, the sectors or themes they plan to invest or the companies based on their market cap. They carry higher risk as the investment is concentrated in a handful of stocks.

Conclusion

Equity mutual fund schemes provide a wide range of choices for investors to plough their money and build their wealth in the long term. Investors must carefully select their scheme based on their risk appetite, investment duration, risk-reward ratio, financial goals, etc. In addition, they must stay invested for a longer time in the selected scheme for the magic of compounding to kick in.

Frequently Asked Questions

1. What is market capitalization?

Market capitalization is a metric that tell you about the total value of the company which is calculated by multiplying the share price with the total number of outstanding shares. This is used to determine whether a company is large-cap, mid-cap or small-cap.

2. What is equity?

Equity is the other name for share or stock and it is one of the popular financial instruments for investing. Broadly speaking, this asset class is riskier compared to debt.

3. What is the difference between multi-cap and flexi-cap fund?

In multi-cap fund, at least 25% of the total asset must be invested across large-cap, mid-cap and small-cap each. Whereas, in flexi-cap, there is no such rule and the fund manager will decide the allocation, but 65% of the total asset must be invested in equity or equity related instruments.

4. What is the benefit of Equity Linked Savings Schemes (ELSS)?

The scheme offers tax benefits to investors under Section 80C of the Income Tax Act. The funds are locked-in for a period of three years, but there is a scope for higher returns as at least 80% of the total asset are invested in equity or equity related instruments. This also increases the risk for this scheme.

5. What is a contra fund?

Contra funds take a bet against the prevailing market trend or sentiment and invest in companies or sectors or themes that has a potential to do well in the future.