Equity as an asset class is known for its high-return potential. However, it is also one of the riskiest asset classes. This is because markets go up and down every minute of the trading hour, impacting the equities directly. While directly investing in the stock market may not be for everyone, a great alternative is to invest in equity-oriented mutual funds.

These funds are professionally managed, well-regulated, and offer the potential for long-term capital growth.

What Are Equity-Oriented Mutual Funds?

As per SEBI mutual fund regulations, an equity-oriented fund has to invest at least 65% of its total assets in equities and equity-related instruments. The rest can be invested into other asset classes, such as debt.

These funds typically aim to generate long-term capital growth for their investors by investing in a portfolio of equities according to the scheme’s stated objective.

Types of Equity-Oriented Funds

As per SEBI's categorization of mutual funds, equity-oriented mutual funds can be further categorized into many types based on market capitalization, investment style, taxation, etc.

Following are some of the most common categorizations of equity funds in India.

• Based on Market Capitalization

  Equity funds can be broadly classified into 6 types based on market capitalization. Take a look.
  
  

  Type of Equity Fund	Fund Allocation
  Large-Cap Equity Funds	Fund allocation of at least 80% into large-cap stocks
  Mid-Cap Equity Funds	Fund allocation of at least 65% into mid-cap stocks
  Small-Cap Equity Funds	Fund allocation of at least 65% into small-cap stocks
  Large and Mid-Cap Funds	At least 35% fund allocation to mid-cap and large-cap stocks each
  Multi-cap Funds	Fund allocation of at least 75% into equities with 25% each into large-cap, mid-cap, and small-cap stocks
  Flexi-cap Funds	Fund allocation of at least 65% into equities with liberty to invest across market capitalizations without any restrictions

• Based on Investment Strategy

  Some equity funds follow a specific investment strategy. Here are a few categorizations of equity mutual funds based on their investment strategy.
  
  

  Type of Equity Fund	Fund Allocation
  Sectoral/Thematic Fund	Minimum of 80% exposure in stocks of a particular sector or theme
  Focused Funds	At least 65% into equities of 30 companies as stated in the Scheme Information Document (SID)
  Contra Funds	At least 65% into equities following a contrarian investment strategy
  Dividend Yield Fund	At least 65% into equities and predominantly investing into dividend-yielding stocks
  Value Fund	At least 65% into equities following a value-based investment approach

• Based on Tax Treatment - ELSS Funds

  ELSS, or Equity Linked Savings Scheme, invests at least 80% into equities and equity-related instruments. These funds come with a 3-year lock-in period during which investors cannot withdraw the funds. In return, investors can claim tax deductions up to Rs 1.5 lakh per year under section 80C in the new tax regime.
  
  Also Read: What Is ELSS Mutual Fund

• Equity-oriented Hybrid Funds

  While pure equity funds invest completely in equities, hybrid funds invest in both equities as well as debt. Some common types of equity-oriented hybrid funds include aggressive hybrid funds that invest between 65-80% into equities, and the rest is invested into debt instruments.

How Do Equity-Oriented Funds Work?

Equity-oriented mutual funds work by pooling money from many investors and investing it in a diversified portfolio of equities. The fund manager uses the money collected from investors to buy stocks of companies based on the fund’s stated investment philosophy.
An equity fund’s performance depends on the performance of the underlying stocks in that fund’s portfolio. The fund manager continuously monitors the market conditions, company performance, and other relevant factors to manage the portfolio effectively.

Benefits of Equity-Oriented Mutual Funds

• Professional Management

  Equity-oriented mutual funds are managed by professional fund managers who have the knowledge and experience to make informed investment decisions. Therefore, investors who do not have the time or expertise to invest directly in stocks are likely to benefit from these funds’ expert management.

• Diversification

  Barring a few focused funds, most equity mutual funds can invest in a diversified portfolio of stocks across different sectors and market capitalizations. This diversification can help spread the risk in case of any adverse market conditions or company-specific issues. Some funds offer more diversification than others.

• Liquidity

  The liquidity is usually high in equity-oriented mutual funds, meaning you can easily buy and sell fund units at the current NAV. So, investors don’t have to worry about the liquidity of individual stocks.
  
  Also Read: What is NAV in mutual funds

Who Should Invest in Equity-Oriented Funds?

• Investors Looking for Equity Exposure

  Many investors may find it overwhelming to spot and buy quality stocks directly on their own. These types of investors can take equity exposure through equity-oriented funds.

• Long-Term Investors

  Equity mutual funds are suitable for investors who have a long-term investment horizon of 5 years or more. This allows the fund to ride out market volatility and generate returns over a longer period.

• Moderate to High Risk-Takers

  Equity-oriented mutual funds carry an inherent risk because of the unpredictable nature of the markets. However, they also come with high return potential. Therefore, these funds can be suitable for investors willing to take calculated risks in return for potentially inflation-beating returns.

Start Your Investment Journey with the Right Equity Mutual Fund

Equity mutual funds carry the potential for long-term wealth creation. Consider investing in a good equity-oriented mutual fund and take the first step towards achieving your financial goals. However, make sure you analyze your risk tolerance and invest accordingly.

Must read: Wealth Creation: What Is It and How to Do It Right?

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.