Thursday, 10 July 2014

Equity Fund Types

Let us consider the characteristics of equity mutual funds.
Equity funds invest a key proportion of their assets in individual companies. They purchase shares through the secondary market, though they also buy these through the initial public offerings (IPOs). The NAVs of these funds react directly to the changes in the prices of the equity shares. Equity mutual funds aim to eliminate internal risks by diversifying investments across several stocks.
Following are the different types of equity funds:
Equity diversified funds: These funds invest a large proportion of their corpus in equity shares across different sectors and market capitalisations (blue chips, large-, mid- and small-cap). Their aim is medium- to long-term capital appreciation.
Dividend yield funds: These aim at providing regular income and steady capital appreciation by investing in stocks that have high dividend yields. These funds are relatively less volatile and risky compared with other equity funds.
Sectoral funds: These invest in the companies that belong to a particular sector, such as Pharmaceutical, IT or banking. Such funds do not invest across multiple sectors, so they are less diversified and carry a high company-specific risk (or unsystematic risk) compared with general equity diversified funds.
Mid- and small-cap funds: As the names suggest, mid-cap funds invest in mid-sized companies, while small-cap funds invest in small firms. The companies are classified as large, mid or small on the basis of their market capitalisation. The mid and small companies are expected to grow at a faster rate compared with the bigger ones. Such funds are volatile and risky as their shares are not very liquid in the market.
Equity index funds: Index funds track a specific market index, such as the S&P CNX Nifty or the BSE Sensex, and aim at returns similar to those of the defined index or benchmark. These funds invest in shares that constitute the index and in the same proportion as that of the index. These are exposed to market, or systematic, risks.
Contra funds: These are a variant of equity diversified funds, which identify and invest in stocks that are highly undervalued but have a strong growth potential in the long run. They aim to invest during periods of high market pessimism and derive benefits when the market recognises the stocks' potential. Such funds are useful only for long-term equity investors.

Have a great day,

Andrew Lumley-Holmes

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