The money you give to the mutual fund is mainly invested in stocks by the fund manager. The gains or losses will pass on to you. The mutual fund is basically composed of the money of a large number of investors. Equity mutual funds invest most of the funds in the equity market. The risk level in equity mutual fund is quite high. The investors are advised to invest in an equity fund as per their risk-bearing capacity. The equity mutual fund is suitable for investors who are looking for long term capital growth. The risk and returns of this investment vary from scheme to scheme as they are managed by the fund manager.
Here is a list of 5 types of popular equity funds, which may suit your portfolios.
- ELSS: – This is “equity-linked saving scheme”. This equity instrument has tax saving benefits. Such funds have a diversified portfolio through which the fund manager has the option to choose from small, medium and large cap limits from all sectors of the economy. This instrument provides tax benefits under section 80c of the income tax act, which has the shortest lock-in period of three years as compared to instruments like NSC and PPF.
Often the investors are attracted to the recent chart-topper companies while making their choices. They are lured by seemingly fat returns. Since the past performance is not necessarily being sustained in the future, we must give priority to the consistency of return over a long time period. You must also check whether the fund is patterned for large-cap or mid-cap. Also, check how diversified or concentrated the portfolio is. Though all ELSS funds have an identical lock-in period, there may be a lot of differences in terms of portfolio compositions.
- Sector funds: – Sector funds concentrate their area of investment in a particular sector such as FMCG, financial services, health-care, power or technology. These sectors are important while composing the diversification of equity fund. The investor should not focus solely on sector fund, because of its focus on a single sector and new companies only. You can consider such funds for investment only if you have a strong view or knowledge on a specific sector or willing to give your portfolio tactical planning. Instead, you should bet on a sector that stays strong in a longer period. For example, the energy funds like “morning star” put up a brilliant performance with a return of 105% in 2007. The investors rushed into it, while the next year it drops down to 53% while it bounced back in 2009, the returns of this fund were abysmal in 2010, 2011 and 2013. Last year it was able to make a recovery of up to 47%, but it was far away from its performance in 2007. Thus the volatility of such funds is much more than a regular equity diversified fund.
- Equity Diversified: – As the name signifies, it is a combination or mix of the two. However, the investor here also must check the market capitalization factor. You should not concentrate on the small and mid-cap fund as the core holding of your portfolio. The core holding of your portfolio must consist of one or two large-cap funds. The primary purpose of the core holding fund in your portfolio is to provide a stable base that does not require much adjustment. They are more or less a solid foundation for the rest of your portfolio.
The non-core funds like sector and mid-cap funds can be more volatile offering the boost to the overall returns.
- Global funds: – This is an extremely diversified category. These are like sector funds which focus on stocks globally. For example, the gold fund would invest in gold mining stocks across the globe. Similarly, you can choose funds in sectors like a commodity, agriculture, and energy. There could be another way to thematically categorize your funds like on the basis of geographical locations such as Europe, US, China, Asia or Japan, etc. You should rather focus on such funds only as a part of the non core holding of your portfolio.
- Hybrid: – These are the balanced funds, which allocates at least 65% of their portfolio to equity in order to qualify it as an equity fund for the taxation purposes. These are great funds for starting an investment, as they provide an automatic allocation to debt and equity in one single fund. If an investor already has an equity fund and wants meager or little exposure to debt fund in his portfolio, he can opt for a balanced fund. The aim of this fund is either to make a kill or fortune when the market shoots up nor crumble like a pack of cards when it falls. It rather facilitates a balanced ride which is less bumpy than an equity fund.
So when looking for a fund, check the volatility in its returns our longer market periods.