There are various types of mutual fund schemes â equity funds, debt funds and tax savings funds etc. Again within equity funds and debt funds there are various categories of schemes available for the investors to invest. We will now examine the various categories of funds within debt and equity.
Different types of Equity Funds
Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over a medium to long-term investment horizon. Equity Funds are high risk funds and their returns are linked to the stock markets. They are best suited for investors who are seeking long term growth. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified equity mutual funds
As per definition, diversified equity mutual funds are purely equity funds which invest in a large number of stocks across different sectors. The objective is to diversify unsystematic risks and generate highest risk adjusted returns. Company specific and sector specific risks are unsystematic risks.
Some research houses (e.g. CRISIL) and publications employ a stricter definition for diversified equity funds. As per their definition diversified equity funds are equity funds, which invest in stocks across different sectors and market segments. In other words, as per this definition, diversified equity funds in addition to investing in stocks across different industry sectors (e.g. Banking, oil and gas, cement and construction, automobiles, technology, pharmaceuticals, capital goods, FMCG, power, infrastructure etc), also invest in stocks across different market segments in terms of market capitalization (i.e. large cap, midcap, small cap and micro cap companies). These funds are also known as flexicap or multicap funds.
Large cap equity mutual funds
Companies are categorized as large cap, mid cap and small cap, based on their relative market capitalizations. Market capitalization is simply the market value of the company, calculated by multiplying the share price of a company with the company' total number of shares outstanding. Bombay Stock Exchange (BSE) categorizes companies into market cap segments based on the 80' 15'5 rule. In the 80' 15' 5 rule, companies listed on BSE are arranged in descending order of market cap (highest to lowest) and starting from the top (company with highest market cap), the largest market companies which cover 80% of the total market cap of all the companies listed on the BSE are categorized as large cap companies.
If BSE market segment definition is too complicated for the average investor, they can simply follow the US market cap limit definitions in dollar terms and translate them to INR currency. If we translate US market cap definitions to Indian Rupees, companies with more than Rs 10,000 Crores of market cap are large cap companies. Companies with market caps between Rs 500 to 10,000 Crores are mid cap companies. Companies with market cap of less than Rs 500 Crores are small cap companies.
The funds which invest amongst the above set companies are called large cap equity funds.
Bluechip companies are the largest of large cap companies. There is no standard definition of bluechip companies; usually they are the very well-known leading companies in their industry sectors and have a strong track record of paying dividends regularly. Bluechip companies have a long history of strong financial performance and sought after by both domestic and foreign investors. Examples of some bluechip stocks are TCS, Reliance, ONGC, ITC, HDFC Bank etc.
Mid cap equity mutual funds
The next set of companies which cover 80 to 95% of the total market cap of all BSE listed companies are categorized as mid cap companies. The last set of companies covering 95 to 100% of total market cap of all BSE listed companies, are small cap companies.
Mid cap companies are typically companies which have a market capitalization ranging from Rs 5,000 Crores to Rs 20,000 Crores. Mid cap companies tend to be less well known, less researched and are thought to be more risky than large cap companies. Mutual fund schemes which invest the majority portion of their portfolio in mid cap companies are called mid cap funds. Midcap funds tend to be more volatile than large cap funds. Midcap funds can also be less liquid than large cap funds in extreme market conditions.
The funds which invest amongst these set of companies are called mid cap funds.
Small cap equity mutual funds
The market capitalizations of small cap companies are less than Rs 5,000 Crores. These companies are smaller than midcap companies and thought to be riskier than even midcap companies. Mutual fund schemes which invest the majority portion of their portfolio in small cap companies are called small cap funds. Small cap funds tend to be more volatile and less liquid than mid cap funds.
The funds which invest amongst these small companies are called small cap funds.
Sectoral Funds
Sector investing is an alternative approach that chooses investments according to a particular theme or sector. Sectoral funds are commonly known as where investment is done in a particular industry of the economy. Some of these industries are real estate, agriculture, FMCG, power and energy, pharmaceuticals, infrastructure, banking, technology, financial services, metal, etc. If an investor thinks that a particular industry will be growing in the near future, he can make his investments in the mutual fund of that particular sector instead of investing in different equity shares of that sector. Such sectoral portfolios are very volatile in nature and the gains and losses depend on how in or out of favour the sector is.
Balanced Funds
Balanced funds, as the name suggests, balance the risks and generates returns between a pure debt fund and a pure equity fund. These type of mutual funds buy a combination of equity stocks (minimum 65%) & long term and short-term bonds (remaining 35%) to provide both income and capital appreciation while avoiding excessive risk. Investing in a Balanced Fund certainly comes as a more judicious choice. It benefits from the tremendous return generating potential of equities and the risk reduction characteristic of fixed income investments. Balanced Funds not only provide Growth to the Invested Corpus but also render stability to the investments made due to holding of debt securities in its portfolio.