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Funds: Equity Funds (Part 1)
The many types of funds under the umbrella of equity fund
Before this, we’ve learned about the different major types of funds available. One of the major types is equity funds. Now, under equity funds, there are many subcategories as well, which differ based on the strategies used by the fund managers for each fund.
Just as a recap, here are the major categories of funds:
P/s: Read this if you want to know what they stand for — Major types of funds.
We are now at “Equity”, but what is it about?
Equity funds are simply mutual funds that invest in the stock market. They buy shares in a company, try to make a profit out of it, and the people who invest in that fund will get the profit. Simple enough, isn’t it? (of course, the fund managers will take their cuts as well — it’s usually very small tho).
The not-so-simple part of it is how do you choose from the many different equity funds available out there? How can you even tell the differences? Do you even need to know the differences?
Yes, you do. Some equity funds are riskier than others. Some have their perks. Some have their own alignments that might suit your beliefs (e.g. if you have a strong conviction that tech companies are the best, then you have to look for a fund that suits that belief).
The many types of equity funds
Equity funds have many different types, each with its own set of strategies or goals. As you can see above, there are two major divisions of equity fund types, which are funds that are based on a company’s market cap, and funds that are based on a company’s movement projection.
We’ll get to each in detail in our next articles. However, here are a brief explanation on each type of equity fund so that you can tell the differences between them:
- Invest in stocks of large, well-established companies with a significant market capitalization.
- Aim for stability and consistent returns, as large-cap companies are generally more stable.
- Focus on stocks of medium-sized companies with a market capitalization between that of large-cap and small-cap companies.
- Seek to capture the growth potential of mid-sized companies.
- Invest in stocks of smaller companies with relatively low market capitalization.
- Tend to have higher growth potential but are associated with higher risk and volatility.
- Have the flexibility to invest across companies of different market capitalizations, including large-cap, mid-cap, and small-cap stocks.
- Adjust the portfolio allocation based on market conditions and the fund manager’s strategy.
- Follow a value investing approach, seeking stocks that are considered undervalued relative to their intrinsic value.
- Aim to benefit from potential price appreciation as the market corrects.
- Follow a growth investing approach, targeting stocks with strong earnings growth potential.
- Aim to benefit from the capital appreciation of companies with high growth prospects.
Dividend Yield Funds:
- Invest in stocks of companies that pay regular dividends.
- Aim to provide a steady income stream to investors in the form of dividend payouts.
Sectoral and Thematic Funds:
- Focus on specific sectors or themes, such as technology, healthcare, or infrastructure.
- Allow investors to concentrate their investments in areas they believe will outperform the broader market.
ELSS (Equity Linked Savings Scheme):
- Offer tax benefits under Section 80C of the Income Tax Act in India.
- Have a lock-in period, and a portion of the portfolio is invested in equity-related instruments.
- Concentrate their portfolio on a limited number of stocks, typically between 20 to 30.
- Aim to achieve higher returns by focusing on the best-performing stocks.
- Take contrarian positions by investing in stocks that are currently out of favor in the market.
- Seek to benefit from the potential turnaround of these undervalued stocks.
These categories provide investors with options to tailor their equity investments based on their risk tolerance, investment horizon, and specific market outlook. Investors need to understand the characteristics of each category and carefully select funds that align with their financial goals.
Want to know more?
Stay tuned for our next articles where we’ll dive into each one and tell you how each type can either be in line with you or not.
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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.