Equity mutual funds give you a plethora of options to choose from. While this is usually a boon, this fact can create confusion too. With too many options to choose from, choosing a fund that works for you can be tough. The key to unlocking this problem is to understand the different types of equity funds. This article discusses the different types of equity mutual funds.
What are equity funds?
Equity mutual funds are funds that invest primarily in stocks. They aim to generate capital appreciation over the long term. Some key points about equity funds. They invest in stocks of companies across various sectors and market capitalizations like large-cap, mid-cap, and small-cap. They carry varying levels of risk depending on the investment objective and underlying assets. Large-cap and diversified funds are considered less risky while mid-cap and small-cap funds are riskier.
Equity funds aim to generate higher returns than debt funds over the long run. However, the returns are volatile and uncertain in the short term. These could be one of the best mutual funds to invest in for long-term financial goals like retirement planning or children’s education. Short-term goals should be better served by debt funds.
Large-cap equity funds
Large-cap equity funds invest primarily in stocks of well-established companies with a large market capitalization. These companies are leaders in their industry and are usually very stable. Large-cap funds are ideal for investors seeking modest but steady long-term capital appreciation with lower volatility.
Mid-cap equity funds
Mid-cap equity funds invest in stocks of mid-sized companies that have potential for strong growth. These companies are still expanding and gaining market share. Mid-cap funds carry higher risk compared to large-cap funds but also potential for higher returns. They are suitable for investors with a higher appetite for risk.
Small-cap equity funds
Small-cap equity funds invest primarily in stocks of small-sized companies with a market capitalization lower than mid or large caps. These companies are in a stage of high growth and expansion. Small-cap funds can offer very high returns over long term but also carry significantly higher volatility and risk. They are best suited for investors with a high-risk tolerance and ability to withstand sharp ups and downs.
Sector and thematic funds
Sector and thematic funds invest in stocks of companies in a particular sector or theme. They aim to generate high returns by investing in the fast-growing sectors or themes. However, they are riskier than diversified funds. These funds are ideal for investors willing to take concentrated risk to achieve focused investment goals.
Value equity funds
Value equity funds follow a value investment strategy and invest in stocks that are trading at a lower valuation compared to their fundamentals. The fund manager aims to generate high returns over long term through capital appreciation by identifying undervalued stocks. These funds may underperform at times but have the potential to deliver strong risk-adjusted returns over market cycles.
Conclusion
Equity mutual funds invest in stocks across the market capitalization spectrum and sectors. Investors can choose a fund based on their risk appetite, investment objective, and time horizon. A well-diversified equity fund portfolio can help generate inflation-beating returns over the long run. Be sure to consider your risk appetite and goals before you buy mutual fund.
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