Equity funds invest in stocks / shares of various companies listed on the stock markets. The performance of these companies over the years and various other market related factors, determine the kind returns that you may earn. These funds generally high risk – high return, and are used to work towards investors long term financial goals, of 3 years and more.
Under the broad category of Equity Funds, there are different kinds of funds, which have different investment strategies. They are:
- Diversified equity funds: These schemes invest in shares of companies of any type. Hence, they have a healthy mix of sectors and companies, and give you a wide exposure to the equity market.
- Sector funds: These are schemes that invest in a particular sector of the equity market. For example, one fund may invest in technology stocks, one in FMCG while another invests exclusively in the power sector. This would enable you to take a focused exposure to the particular sector of your choice.
- Thematic funds: These are schemes which invest in a particular theme; funds that only invest in small cap companies or companies of specified market capitalization range, funds that aim to find value stocks in the markets, or funds that invest only in the infrastructure and allied industries like construction, power, mining, electricity etc.
- Index funds: These schemes try to replicate a specific stock index with an aim of providing returns matching the underlying index. For example, a NIFTY fund would invest in the stocks forming the NIFTY index in the same proportion as the index. The fund manager has to simply copy the index. This type of investing is also called as passive investing.
- ETFs: Exchange Traded Funds are similar to index funds but they are listed on the stock exchange. You can buy and sell these funds on the stock exchange.
- Tax saving funds: These funds are commonly referred to as Equity Linked Saving Schemes (ELSS). They are diversified equity funds that offer tax benefits under Section 80C of the Indian Income Tax Act, 1961. They provide investors with tax deductions up to a maximum of Rs. 1 lakh invested. These funds have a lock-in period of three years, which means that you cannot sell your units for 3 years from the date of investment.