Equity Fund Meaning - What is Equity Fund

Find out all about the different types of equity fund investments.

Key Takeaways

Equity mutual funds essentially invest in equity stocks of large, mid, and small-cap companies
Fund managers also select stocks based on themes and sectors.
The SEBI has classified equity funds into ten different types
You can invest via SIP or lump sum.
SEBI has capped the expense ratio on equity funds at 2.5%.

Separated by types, sizes, and categories, mutual fund investment instruments are designed for people with varying risk appetites and investment goals. While investors with lower risk appetites tend to gravitate towards debt funds, those with aggressive risk appetites are more likely to invest in equity funds. Let us find out what is equity fund and the various types of equity funds in this article.

What is Equity Fund?

An equity mutual fund, simply referred to as an Equity fund, is a mutual fund that attempts to generate relatively higher returns than most other mutual fund categories. An equity fund manager generally invests about 60% of the pooled assets into equity stocks of various companies across varying market capitalisations. Equity funds are typically synonymous with the cliché share-market adage that goes, ‘higher the risk, higher the returns. These funds provide better returns compared to debit or hybrid funds. The returns you accrue largely depend on the performance of the companies chosen by the fund manager in the equity fund portfolio.

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Types of Equity Funds

The Securities and Exchange Board of India (SEBI) has classified Mutual Funds into five major groups. Of these, Equity funds are further sub-categorised into ten different types⁽¹⁾. The following are the different types of Equity Mutual Funds:

Type of Equity Fund	Invests in	Approximate Asset Allocation (in %)
Multi Cap Fund	Equity & equity-related instruments	65%
Large Cap Fund	Equity & equity-related instruments of large-cap companies	80%
Large & Mid Cap Fund	Equity & equity-related instruments of large-cap & Mid-cap companies	35% + 35% = 70%
Mid Cap Fund	Equity & equity-related instruments of Mid-cap companies	65%
Small Cap Fund	Equity & equity-related instruments of Small-cap companies	65%
Dividend Yield Fund	Dividend yielding stocks	65%
Value Fund/Contra Fund	Funds following a Value/Contrarian Investment Strategy	65%
Focused Fund	A focused number of stocks (maximum 30)	65%
Sectoral/Thematic Fund	Equity & equity-related instruments of a particular sector or theme	80%
Equity Linked Savings Scheme	equity & equity related instruments with 3-years lock-in period	80%

Equity Fund Features

All types of Equity funds are highly liquid investment instruments, except ELSS funds which come with a 3-year lock-in period.
Since frequent buying and selling can impact the expense ratio of equity funds, the SEBI has capped the expense ratio on these funds to 2.5%
Capital gains from equity funds are taxable in the hands of the investor and depend on whether they stay invested for the short or long term.
Due to diversified asset allocation, equity funds also provide investors with opportunities to diversify their investment portfolios.
The SEBI regulates all types of equity funds to ensure transparency.

Conclusion

Now that you know what is equity fund and its types, you can consider this investment. As mentioned earlier, equity funds are ideal for investors with higher risk appetites. Like all mutual funds, these funds too are managed by professional fund managers. Furthermore, you can invest a lump sum amount or utilise the systematic investment plan (SIP) investment method.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.