Know how exactly an equity fund invests your money

Equity funds are prudent for those looking to participate in equity markets and are aware of the concept of stock purchases. However, when it is about equity mutual funds, you as an investor often tend to get confused with the objectives of distinct equity fund categories. In case you are eyeing to make an ideal investment decision, you must ensure to know all about equity mutual funds. Here’s a deep dive into equity funds to allow you to understand where exactly different equity mutual funds invest your money.

What is an equity mutual fund?

An equity mutual fund essentially purchases ownership of distinct companies that are publicly traded. This is done by investing a pool of your money as an investor in business stocks. The goal of all equity mutual funds is to seek opportunities to invest in companies that would grow thus generating high profits for you as a shareholder.

What are the distinct kinds of equity mutual funds?

There are distinct kinds of equity mutual funds categorised based on risk levels and market capitalisation. Mentioned below are equity funds based on risk levels.

Fund typeInvestment portfolioRisk level
Thematic fundsInvestments are performed in themes like energy, infrastructure, rural India, energy, and othersSuch funds hold high-risk levels as the investment is dependent on the conviction and perception of a fund manager and fund house
Sectoral fundsActively managed where the whole fund investible is spread across two to three sectorsHigh-risk level owing to the concentration of investment in handful sectors
Index fundsPortfolio composition is in similar proportion as per the index it followsThe risks are the same as its benchmark index
ELSS (equity-linked savings scheme)Such funds invest throughout all sectors, thus diversifying the risks and providing you with the twin benefits of tax savings and capital gainsExpected to outperform fixed income assets and inflation if remained invested for a long time period
Diversified equity mutual fundInvestments are performed in equities throughout distinct sectors to spread out the riskZero concentrated risk

Equity funds based on market capitalization

Market capitalisation is the overall valuation of a company depending on its existing share price and outstanding stocks. Thus, based on market capitalisation, equity funds include large-cap mutual funds that invest in known blue-chip stocks, mid-cap mutual funds that invest in businesses with the potential to grow over time into large businesses and small-cap equity funds that invest in small-cap stocks with good fundamentals.

In most of these equity mutual funds, you have the choice to select between dividend and growth options. In the growth option, retail investors do not get any payment in the form of dividends or bonuses. All the returns are reinvested to make the most out of the compounding effect i.e., generate higher returns over time. Under dividend mode, you get payouts periodically. So, often it is recommended to opt for the growth option if you are looking to invest for your long-term goals as this option holds the potential to generate higher and inflation-beating returns over the long term by a wide margin. 

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