What are Equity Funds?
Equity Mutual Funds are mutual funds that invest the majority of the corpus in equity stocks of companies, these funds are relatively volatile in comparison to debt funds. Equity mutual funds are categorized on the basis of the size of the company they invest in, and the investment method of the holdings. The size of the company is determined by the market capitalization, which is dependent on the price of the company’s stock, it is calculated by multiplying the market value of the company’s shares with the number of shares outstanding (market value of share X number of shares outstanding), while the investment methodology is determined by the fund’s stock holdings.
Types of Equity Funds
Small-cap funds invest the majority of the corpus into companies with low market capitalization. Small cap companies are typically defined as companies with a market capitalization of less than Rs. 500 crore, these are usually start-ups or companies in their infancy, which have high growth potential. Small cap companies have great growth potential but also come with a risk of failure.
Mid Cap funds invest the majority of the corpus into companies with medium market capitalization. Mid Cap companies are companies with a market capitalization between Rs. 500 crore and Rs. 10,000 crore, these companies are in their development stage and lie between small-cap companies and large-cap companies. Since the price of large-cap stocks is quite high, mutual funds have started increasingly investing in mid-cap stocks.
Large-Cap funds invest at least 80% of the corpus in the top 100 companies by market capitalization. The funds are invested in well-established companies which have been consistently turning a stable profit. The market capitalization of large-cap companies is usually Rs. 10,000 crore or above and include blue-chip companies. These funds are relatively stable due to the nature of the investment.
Multi-Cap Funds are highly diversified funds that invest the corpus across all market capitalization rates. These funds are relatively stable when compared to small and mid-cap funds as they use a balanced methodology to mitigate volatility and provide comparatively higher returns to large-cap funds.