6 MinsSep 07, 2022
You are drawing up a financial plan to invest in for your future goals and are convinced that mutual funds are the best option, especially for your long-time goals. But should you invest in an Equity Fund or a Hybrid Fund? After all, both categories
of funds invest in equities. However, barring this one similarity, these two categories of funds are different in their risk profile, permitted allocation to equity and so on. Read on to know how to choose the right one to invest in.
Equity Funds are broadly categorised into 11 sub-categories based on their underlying investments:
1)Large-cap Fund – Invests 80% in the first 100 companies, on a full market capitalisation
2)Mid-cap Fund – Invests 65% of their assets in companies ranked 101st to 250th in terms of total market capitalisation.
3)Large & midcap Fund – Invests a minimum 35% of asset under
management in equity & equity-related instruments of large-cap companies and simultaneously allocated a minimum 35% to mid-cap stocks.
4)Small-cap Fund – Invests 65% in companies that are 251st onwards on a
full market capitalisation basis.
5)Multi-cap Fund – Invests in a mix of large, mid, and small-sized companies, with at least 25% in each segment.
6)Flexi-cap Fund – Invests at least
65% of assets in equity and equity-related instruments, with a dynamic allocation to large-cap, mid-cap, and small-cap stocks.
7)Dividend Yield Fund – Invests at least 65% in dividend-yielding stocks, which could
be from any market capitalisation segment.
8)Value/Contra Fund – Invests in stocks that are trading below their intrinsic/fair value but have strong fundamentals and hold them till their value is realised. They
maintain at least 65% exposure to equities.
9)Focussed Fund – Invests 65% in equities, where the focus is on holding fewer stocks (maximum 30) -- which may be from across market cap segments. So, a concentrated
portfolio is held with high conviction bets.
10)Sector/Thematic Fund – Invests invest primarily in companies from a single industry or theme, with at least 80% exposure to such equities.
11)Equity Linked Saving Schemes (ELSS) – Also known as tax-saving mutual funds, they offer tax exemption on investments of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. They have a lock-in period of 3 years. They invest a minimum of 80% in equity and equity-related
If you have long-term financial goals to address, your investment horizon is at least 3 to 5 years, and you have a high-risk appetite, investing in equity mutual funds is the best option for you. Equity funds provide long-term capital appreciation.
They are best suited to address your long-term financial goals. Select the fund based on your risk profile and time horizon.
So, for example, if you are a very high-risk taker and have a time horizon of 7-8 years or more, you may consider
mid-cap funds and small-cap funds.
Alternatively, if you are looking for stability, choose large-cap funds and/or dividend yield funds.
Similarly, if you want to achieve the dual objective of tax-saving and wealth creation, then
ELSS is a worthwhile option for you.
For tactical exposure to both equity and debt, Hybrid Funds are a suitable choice. They provide capital appreciation of equity assets and regular income from debt securities. If you are a moderate risk taker,
in the late wealth accumulation phase (between 50 and 60 years of age), and have certain financial goals to address in the medium term, consider hybrid funds.
[Also Read: Include a mix of asset classes in your investment portfolio]
Depending on their exposure to equity and debt, Hybrid Funds are categorised into five key types:
1) Balanced/Aggressive hybrid– A Balanced Hybrid Fund invests 40% to 60% of total assets in equities and 40% to 60% in debt instruments. No arbitrage is permitted in this scheme. An aggressive Hybrid Fund invests 65% to
80% in equities and the remaining 20% to 35% in debt instruments. It could even explore arbitrage opportunities.
If you are a moderate-to-high risk-taker and wish to have almost an equal balance of both equity and debt; a Balanced Hybrid
Fund could be an appropriate choice with an investment horizon of around 3 to 5 years. If you are willing to take a slightly higher risk and your investment horizon is 5-6 years, then Aggressive Hybrid might be apt.
2) Conservative Hybrid Fund – Invests 10% to 25% of total assets in equity & equity-related instruments and the remaining 75% to 90% in debt instruments. Due to the dominant allocation towards debt instruments, it is also known as a Debt Hybrid Fund.
you do not have a high-risk appetite, are looking for modest returns, addressing goals that are around 3 to 5 years away, a Conservative Hybrid Fund may be appropriate.
3) Dynamic Asset Allocation Fund or Balanced Advantage Fund – Strategically, a Dynamic Asset Allocation Fund may go from 100% in equity (across market capitalisations and sectors) to 100% in debt (across maturity profiles and debt papers), depending on where and how the fund management team foresees
the opportunities and threats playing out in the respective asset classes. There is no restriction on minimum or maximum exposure to either equity or debt.
It is suitable for moderate-to-high risk appetite and an investment time horizon
of around 3 to 5 years.
4) Multi-asset Allocation Fund – Such a fund can invest a minimum of at least 10% each in all three asset classes –– equity, debt, and gold. A Multi-Asset Allocation Fund
may be considered to seek capital appreciation over 3 years or so by investing in these asset classes and assuming moderate-to-high risk. While debt is considered less risky than equities, equities can potentially generate superior returns.
Additionally, including gold would improve portfolio diversification.
5) Equity Savings Fund – Invests a minimum of 65% in equity & equity-related instruments and a minimum of 10% in debt instruments. To put
it simply, an equity savings fund could invest in equity and equity-related instruments (including derivatives) and debt & money market instruments. These funds could explore arbitrage opportunities.
Select this fund only if you have
a high-risk profile and a long-term investment horizon of 3 to 5 years.
You can select a mutual fund scheme suited to your needs online!
To make a sensible choice, zero in on schemes that align well with your risk profile, broader investment objectives,
the asset allocation best suited for you, your financial goals, and your investment time horizon.
Disclaimer: This Article has been authored by PersonalFN, a mumbai-based financial planning and mutual fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision