Types of Equity Funds in India – Definition, Types, Equity Investments

Types of Equity funds in India

Mutual Fund is a popular tool of investment among investors. There is a wide range of mutual funds available in India. Hence, it is essential to understand the characteristics of the mutual funds to avoid any potential losses keeping in mind the risk appetite. Broadly, there are three types of mutual funds- equity, debt, and hybrid. The article will brief you on the types of equity funds in India.

However, before understanding the types of equity funds in India, let’s know the meaning of equity mutual funds. Equity funds are investments in a portfolio of companies. The fund manager invests in companies across various sectors to diversify the investor’s portfolio and earn maximum returns. Moreover, these funds provide more returns than debt and hybrid mutual funds. The risk factor is also more as the fund’s performance depends on the volatile market conditions. Therefore, they carry higher risk and provide more returns than other mutual funds.

According to SEBI (Securities Exchange Board of India), a mutual fund becomes an equity fund if the fund manager invests at least 60% of the total funds into equity shares of different companies. The remaining portfolio gets invested into debt funds or money market instruments as per the investment objective. It protects portfolio from volatile markets and avoids excessive losses.

In India, there are 12 types of equity funds. SEBI has introduced various categories for better product differentiation. It also helps investors to better understand the products before investing. Now, let’s look at the types of equity funds in India.

Types of Equity Funds in India as per market capitalization:

Large Cap Funds

Large-cap stocks are top 100 companies in India as per market capitalization. They provide returns in the long term. Hence, large-cap funds primarily invest in the top 100 companies in India. As per SEBI, the fund manager must invest at least 80% of the total assets in these large-cap stocks. The managers invest the balance into the mid-cap, small-cap, or other assets. These companies have a good brand value, strong financials, huge public ownership, and market leadership in their sectors. Investments in large-cap stocks are less risky due to consistent profits, sustainable business, and customer loyalty. Some large-cap funds in India are- Canara Robeco Bluechip Equity Fund, Nippon India Large Cap, etc.

Mid Cap Funds

Mid-cap stocks are the 150 companies according to market capitalization after large-cap stocks. They include 101st to 250th stocks. These stocks are smaller in size compared to large-cap companies. They are riskier than large-cap stocks. However, they are fast-growing companies with high growth potential. Hence, the returns are also higher than large-cap stocks. They provide market-beating returns. But they are volatile and are likely to stumble more during difficult market conditions. As per SEBI, the fund manager must invest at least 65% of the total assets in the equity shares of mid-cap companies. The remaining gets invested in a large-cap or other assets. For example, Motilal Oswal Midcap 30 Fund, PGIM India Midcap Opportunities Fund, etc.

Types of Equity Funds in India by market capitalization

Small-Cap Funds

Small-cap stocks are the remaining stocks after mid-cap according to market capitalization. It includes 251st stock and other smaller stocks. They provide fantastic returns but are highly volatile. Hence, one can experience losses in the short or medium term. Moreover, they won’t sustain in difficult market conditions and have poor financials. The risk and return factors are the highest in small-cap stocks. The fund manager must invest at least 65% of the total assets in small-cap stocks and the remaining in other equity assets. For instance- Quant Small Cap Fund, Canara Robeco Small Cap Fund, etc.

Large and Mid Cap Funds

SEBI mandates fund houses to invest at least 35% of their assets in large-cap stocks, the other 35% in mid-cap stocks and the remaining in other assets. The fund invests in a combination of blue-chip and medium-sized companies. It offers the stability of large-cap companies and aggressive returns from mid-cap companies. It is less risker than investing in mid-cap funds. For example- ICICI Pru Large and Mid Cap Direct Fund, Quant Large and Mid Cap Fund, etc.

Multi-Cap Funds

Multi-cap funds invest in equity shares of companies of all sizes (large, mid, and small) and sectors. The fund manager decides the ratio to invest assets between large, mid and small-cap companies according to the market conditions. The manager must invest 25% each in large, mid and small-cap stocks. They must invest at least 75% of the total assets in stocks. For instance, Invesco India Multi-Cap Fund.

Flexi Cap Funds

Flexi cap funds also invest in large, mid, and small-cap stocks. The only difference is in the percentage as per SEBI rules. The fund managers must invest at least 65% of the corpus in equity or equity-related instruments. For example, PGIM India Flexi Cap Fund.

Types of Equity Funds in India as per investment strategy:

Dividend Yield Funds

The fund managers invest a minimum of 65% of the corpus in high-dividend yielding stocks. The dividend yield is the ratio between the stock’s dividend and the current market price. Generally, matured companies pay a higher dividend and are less risky. They have stable cash flows and business models. For example, ICICI Prudential Dividend Yield Equity Fund, etc.

Value Funds

These funds follow the value investment principles of legends like Warren Buffet. They invest in stocks available at discounted prices and have high growth potential. The fund managers find the intrinsic value of the stock and select stocks having a low price to earnings ratio but relatively higher dividend yields. Moreover, they must invest 65% of the corpus into Value Funds. They also follow a contrarian investment strategy, trading against the market sentiment. In simple terms, if the market buys, the fund managers sell and vice-versa. They believe that crowd behaviour could lead to mispricing. Hence, they are also known as Contra Funds. For instance, SBI Contra Fund, Nippon India Value Fund, etc.

Types of Equity funds in India as per investment strategy

Focused Funds

SEBI mandated fund managers to invest their corpus up to 30 stocks. There is less diversification as they need to invest in only 30 stocks. Therefore, the risk concentration is more than in other equity funds. Here, stock selection and market analysis become essential. For instance, Mirae Asset Focused Fund, Quant Focused Fund, etc.

Thematic/Sectoral Funds

SEBI mandates these funds to invest at least 80% of their assets in the specific sector. Sectoral funds invest in one particular industry or sector, like banking, pharmaceutical, technology, etc. However, thematic funds invested in a theme which are inclusive of various sectors. For instance, pharmaceutical themes invest in health insurance, wellness products, hospitals, etc. Hence, theme funds diversify one’s portfolio more than sectoral funds. However, both the funds have higher risks compared to other funds. Financial advisors suggest investing in such funds as an add-on to the already diversified portfolio. For instance, Tata Digital India Fund, UTI MNC Fund, etc.


International Funds

As the name suggests, the fund invests the corpus in stocks listed outside India. Moreover, it helps to reduce portfolio risks as global markets rarely go down together. It helps invest in global giants like Apple, Google, Facebook, etc. For instance, DSP World Mining Fund, Franklin India Feeder Franklin US Opportunities Fund, etc.

ELSS/Tax saving funds

ELSS funds (Equity Linked Savings Funds) help save tax when one invests in the long-term. The investments in these funds are eligible for deductions under section 80C up to ₹1,50,000. The fund managers must invest 80% of total assets in stocks. Moreover, there is a mandatory lock-in period of three years. Financial advisors suggest investing money in ELSS funds for long-term goals as they have the potential to give more returns in a long period. For instance, Mirae Asset Tax Saver Fund, Quant Tax Plan, etc.