Equity funds invest in equity instruments issued by companies. The funds target long-term appreciation in the value of the portfolio from the gains in the value of the securities held and the dividends earned on it. The securities in the portfolio are typically listed on the stock exchange, and the changes in the price of the securities are reflected in the volatile returns from the portfolio. These funds can be categorized based on the type of equity shares that are included in the portfolio and the strategy or style adopted by the fund manager to pick the securities and manage the portfolio.
Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors and market capitalization. The risk of the fund’s performance being significantly affected by the poor performance of one sector or segment is low.
Market Segment based funds invest in companies of a particular market size. Equity stocks may be segmented based on market capitalization as large- cap, mid-cap and small-cap stocks.
• Large- cap funds invest in stocks of large, liquid blue-chip companies with stable performance and returns.
• Mid-cap funds invest in mid-cap companies that have the potential for faster growth and higher returns. These companies are more susceptible to economic downturns. Therefore, evaluating and selecting the right companies becomes important. Funds that invest in such companies have a higher risk, since the selected e companies may not being able to withstand the slowdown in revenues and profits. Similarly, the price of the stocks also fall more when markets fall.
• Small-cap funds invest in companies with small market capitalisation with intent of benefitting from the higher gains in the price of stocks. The risks are also higher.
Sector funds invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold-related companies. The performance of such funds can see periods of under-performance and out-performance as it is linked to the performance of the sector, which tends to be cyclical. Entry and exit into these funds need to be timed well so that the investor does not invest when the sector has peaked and exit when the sector performance falls. This makes the scheme more risky than a diversified equity scheme.
Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus more broad-based than a sector fund; but narrower than a diversified equity fund and still has the risk of concentration.
Strategy-based Schemes have portfolios that are created and managed according to a stated style or strategy. Equity Income/Dividend Yield Schemes invest in securities whose shares fluctuate less, and the dividend represents a larger proportion of the returns on those shares. They represent companies with stable earnings but not many opportunities for growth or expansion. The NAV of such equity schemes are expected to fluctuate lesser than other categories of equity schemes. Value fund invest in shares of fundamentally strong companies that are currently under-valued in the market with the expectation of benefiting from an increase in price as the market recognizes the true value. Such funds have lower risk. They require a longer investment horizon for the strategy to play out.
Growth Funds portfolios feature companies whose earnings are expected to grow at a rate higher than the average rate. These funds aim at providing capital appreciation to the investors and provide above average returns in bullish markets. The volatility in returns is higher in such funds. Focused funds hold portfolios concentrated in a limited number of stocks. Selection risks are high in such funds. If the fund manager selects the right stocks then the strategy pays off. If even a few of the stocks do not perform as expected the impact on the scheme’s returns can be significant as they constitute a large part of the portfolio.
Equity Linked Savings Schemes (ELSS) are diversified equity funds that offer tax benefits to investors under section 80 C of the Income Tax Act up to an investment limit of Rs. 150,000 a year. ELSS are required to hold at least 80 percent of its portfolio in equity instruments. The investment is subject to lock-in for a period of 3 years during which it cannot be redeemed, transferred or pledged. However, this is subject to change in case there are any amendments in the ELSS Guidelines with respect to the lock-in period.
Rajiv Gandhi Equity Savings Schemes (RGESS) too, as seen earlier, offer tax benefits to first-time investors (direct equity). Investments are subject to a fixed lock-in period of 1 year, and flexible lock-in period of 2 years.
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