6 min read • Published 9 Jan 25
Equity Mutual Funds in India
Table of Contents
Investing has become a crucial part of modern life, and stocks are one of the most attractive instruments in it. However, market risk is an inseparable part of equity markets, and it may discourage investors. A prominent solution to this issue is equity mutual funds. They provide desired exposure to equity markets, along with the diversification of mutual fund schemes.
This unique feature has been a key factor in the overall mutual funds industry growth. It is visible in the growth trajectory of Asset Under Management (AUM) of equity funds and total mutual funds.
Source: AMFI
Let’s understand this category of equity mutual funds in detail and explore its pros and cons.
What is an Equity Mutual Fund?
Equity mutual funds are the schemes that invest in the equity markets. Investors get an indirect exposure to the equity markets. The poll may also include other assets like debt securities, gold, etc., but the major allocation would be in the equities.
Further, units of such equity mutual funds are allotted to the investors based on their investment amount. It provides exposure to different stocks in a single investment. Also, mutual fund investments may start at ₹500, which would suit small investors.
Based on the market conditions of the invested stocks, the Net Asset Value (NAV) of these funds will change and affect the number of units. The benefits of mutual fund facilities are an added advantage. These facilities are:
- Systematic Investment Plans (SIPs)
- Systematic Withdrawal Plans (SWPs)
- Systematic Transfer Plans (STPs)
Due to close market association, varied factors contribute to the equity mutual fund’s performance.
Factors Affecting Equity Funds
Equity markets are one of the most risky investment avenues as they are affected by multiple factors. Some of the factors are discussed below:
- Instrument Performance: The performance of stocks from specific industries or a type will make a significant impact on the NAV of these funds. Moreover, their demand-supply will also have an effect on the performance.
- Economic Conditions: Positive or negative economic growth or change in the indicators such as inflations, interest rates, etc., can affect the market and ultimately these funds. Moreover, this effect will be evident when major economic shifts happen in the country.
- Geopolitical Issues: These factors majorly affect the equity funds due to modern globalisation conditions. For example, in November 2024, the AUM of equity funds dropped by nearly 2% from October 2024. This was due to the fall of the equity market in India. Factors like US elections and market fall, ongoing wars, China stimulus talks, FII selling, etc.
- Fund Management: It is one of the most crucial factors in mutual fund investment. Smaller fund size, frequent changes in fund manager, historical performance, expense ratio, etc., can also affect the equity mutual funds.
This category of mutual funds has varied types as per the norms of the Securities Exchange Board of India (SEBI).
SEBI Categorisation of Equity Mutual Funds
The following types of equity mutual funds are categorised based on their market capitalisation, industry, theme, etc.
| Particulars | Specifications |
| Multi Cap | At least 75% in equity markets. |
| Flexi Cap | Minimum of 65% in equity markets. |
| Large Cap | Minimum: 80% of the portfolio in large-cap stocks. |
| Mid Cap | Minimum of 65% in mid-cap stocks. |
| Small Cap | Minimum of 65% in small-cap stocks. |
| Large and Mid Cap | Minimum: 35% in large-cap and 35% in mid-cap |
| Dividend Yield | Invests a minimum of 65% in stocks. Focus- dividend yields |
| Value | Invests a minimum of 65% in stocks with a value investment strategy. |
| Contra | Contrarian investment strategy, 65% in equities. |
| Focused | Specific number of stocks in the basket. (65% in equity) |
| Thematic/Sectoral | Minimum of 80% in specific sectors. |
| Equity-Linked Savings Scheme | At least 80% in stocks. Provides deduction under section 80C of the Income Tax Act 1961. 3 years lock-in. |
Source: AMFI
Understanding what is equity mutual fund may not thoroughly help investors in making investment decisions. Evaluating its positive and negative aspects is crucial.
Pros and Cons of Equity Mutual Funds
Every coin will have heads and tails, and so does every investment instrument. Similarly, the benefits and shortfalls of equity mutual funds are as follows:
| Pros | Cons |
| Provides desired diversification in the equity market. | Market risk will always be an inherent part of this investment. |
| The funds are professionally managed and do not demand the active attention of investors. | Investors will earn dividends only under specific plans and fund house discretion. |
| It has lower risk than direct investment in equity markets. | Exit load and management expenses can be added costs. |
Investors should analyse the funds and their risks to make investment decisions.
Conclusion
Mutual fund investments have become a trend in India due to their suitability for retail investors. Equity mutual funds have been a key contributor to this trend. Investors can get their desired exposure and diversification through small investments. However, one should assess its risk and then invest in such funds.
Q: Can I do SIP for equity mutual funds?
Yes, SIP can be applied to any mutual funds based on SEBI categorisations. Investing in equity funds with SIP can help average out the cost in the long term. Moreover, it will provide the exposure of stocks that may be expensive in direct purchase. Also, investors can transfer investments from other funds to equity funds by STP.
Q: Why did equity funds AUM decrease in November 2024?
In November 2024, the equity funds folios and schemes increased from the previous month, but its AUM was down by nearly 1.4%. This was due to a fall in the NAV of major equity schemes. The NAV fall was the result of an overall dip in the equity market due to FIIs selling, an increase in inflation, global unrest, China stimulus, etc.
Q: How do equity funds work?
These types of mutual funds have their major allocation in the equity market, usually above 35%. They create a basket of stocks based on specific characteristics. Further, they allot units of this basket/scheme to the investors as per their investment. They may also have debt and other assets in the basket, but the major part would be equity.
Q: What is the main risk while investing in equity mutual funds?
The equity market itself is a potentially risky avenue. When equity funds invest in it, the risk may be reduced to some extent by diversification. However, market risk will be an inherent risk in this investment. Apart from this, risks regarding fund management, industry, interest rates, etc., can affect the funds.
Q: What factors affect equity mutual funds?
Due to direct market exposure of equity instruments, the mutual funds investing in them have exposure to multiple factors. These can be government policies, inflation, geopolitical conditions, company performance, economic cycle, liquidity, etc.
