• Best performing asset class in the long term : Historical data shows that, equity has been the best performing asset class in the long run – For example, in the last 20 years, the BSE Sensex has given 11.2% annualized returns (Period: 1st Jan 2001 – 13th April 2020) which is much higher than bank fixed deposits and Gold.
^{Source: Advisorkhoj}
• Risk diversification : By investing in an equity mutual fund in India, you invest in a basket of diversified portfolio of stocks across different sectors and thus able to diversify any company or sector specific risks to a greater extent. Contrary to this, if you invest directly in stocks, you are exposed to company and sector risk along with the market risk. Mutual funds work on concept of pooling money from many investors, thus risk diversification can be achieved even with a small investment.
• Professional fund management : Equity mutual funds are managed by fund managers of an AMC whose track record is available in the public domain. Investors can leverage the experience and expertise of the AMC fund management team and aim to get superior returns on their investments. Stock selection is not an easy task as it requires careful analysis of different factors like capital structure, financial performance of the company, various risk factors, competition analysis etc., and therefore, the investor should bank only on professional fund managers with the necessary experience and expertise to manage their investments.
• Small investments may help you in creating a bigger corpus : You can invest in equity mutual funds through systematic investment plans (SIP) mode as it offers a convenient way of investing small amounts at a set frequency and date in a disciplined way. The amount fixed by you, get debited automatically from your bank account on the specified date and invested in a mutual scheme of your choice till the period chosen by you. You can accumulate a decent corpus by investing through SIPs. For example – A monthly SIP of Rs 5,000 over 20 year period can get you a corpus of Rs 50 Lakhs assuming you get 12% annualized returns.
• Tax Advantage : Equity funds enjoy significant tax advantage. Long term (investments held for more than 12 months) capital gains from equity funds are tax free upto Rs 1 Lakh in a financial year. Long term capital gain over Rs 1 Lakh is taxed at 10%. Short term (investments held for less than 12 months) capital gains are taxed at 15%.

Type of Equity Mutual Funds

There are 11 different categories of equity funds based on SEBI categorization of Equity Mutual Fund
Schemes -

• Multi Cap funds : Multi Cap equity funds are open ended schemes which can invest minimum 65% of their total portfolio in equity and equity related instruments of large, mid and small cap stocks. As these funds invest across various sectors and market capitalizations, the negative performance of one sector does not affect the entire portfolio. Multi Cap equity funds aim for medium to long term capital appreciation and suitable for investors who have high risk profile and minimum 5 years of investment horizon.
• Large cap funds : As the name suggests, large cap equity mutual funds can invest 80% of their total assets in large cap companies. Large cap companies are 1st – 100th company in terms of full market capitalization. These companies are well established names with strong market share and are considered safer compared to mid and small cap companies. Large cap funds can be suitable for Investors with moderately high risk taking appetite with 4-5 years of investment horizon.
• Mid cap funds : Mid cap equity mutual funds are open ended schemes which can invest upto 65% of their total assets predominantly in mid cap stocks. Mid-cap companies are 101st – 250th company in terms of full market capitalization. These companies may not be well known and are perceived to be riskier compared to large cap companies. Mid cap funds can be suitable for Investors with high risk taking appetite with over 5-7 years of investment horizon
• Small cap funds : Small funds are open ended schemes which can invest upto 65% of their total assets predominantly in small cap stocks. Small caps are 251st company onwards in terms of full market capitalization. Small cap companies are mostly not very well known and are perceived to be very risky in comparison to large and mid-cap companies. Investors with high risk taking appetite with around 7-10 years investment horizon may consider investing in these funds.
• Large and mid-cap fund : According to the SEBI mandate of this category, the minimum allocation to large and midcap stocks in these equity mutual funds is 35% each and the maximum can be 65% each. A large and midcap fund’s market cap characteristics are relatively more predictable than a multi-cap fund because we know the minimum allocations to different market cap segments. Only investors with high risk appetites and minimum 5+ year investment horizon should invest in large and midcap funds because these schemes may have fairly significant exposure in midcap stocks.
• Dividend Yield Funds : These equity funds invest at least 65% of its portfolio predominantly in high dividend yielding stocks. These funds are ideal for investors with moderately high risk taking appetite.
• Value Fund : These equity funds follow a value investment strategy and invest at least 65% of its portfolio in equity or equity related instruments.
• Contra Fund : These equity funds follow a contrarian investment strategy and invest at least 65% of its portfolio in equity or equity related instruments.
• Focused fund : Focused Funds are equity funds which can invest maximum in 30 numbers of stocks. There is no restriction with regards to sector or market cap exposure. In terms of mandate, these funds are like multi-cap funds only but with a portfolio of maximum 30 stocks.
• Equity-linked Saving Schemes : Equity-linked Saving Schemes or ELSS Funds are essentially multi-cap equity funds but they have lock-in period of 3 years from the date of investment as one can save taxes under Section 80C of The Income Tax Act 1961 by investing maximum Rs 150,000 in a financial year. ELSS funds may invest upto 80% of their total assets in equity and equity related instruments.
• Sectoral / Thematic Funds : Sectoral or thematic funds are open ended equity fund which has to invest minimum 80% of the portfolio in equity or equity related instruments of a particular theme/ sector. Some example of these funds could be – Pharma, Technology, Consumer or Infrastructure themes/sector. These funds carry the highest risk and thus suitable only for investors with very high risk taking appetite and long term investment horizon. Also, as these are very high risk category of fund, it should not be part of investors’ core mutual fund portfolio.