Types of equity schemes

Types of equity schemes

let us take note of the various types of mutual fund schemes. The main types are:
(1) Equity Schemes
(2) Bond Schemes
(3) Balanced Schemes
(4) Money Market or Liquid Schemes

Types of equity schemes

Equity schemes are the most important among mutual fund schemes. The original purpose of mutual funds was to enable small investors to invest in equities. Within equity schemes, most of the mutual funds offer several options, such as growth plan, dividend plan and dividend reinvestment plan.

Equity schemes enjoy a tax advantage: the return from such schemes, whether dividend or long-term capital gain, is totally exempt from  income tax in the hands of the recipients. Most equity schemes invest the bulk of the fund in equities.

Broadly diversified:

The fund manager is entirely free to choose the composition of the equity portfolio. For ensuring a certain minimum degree of diversification, SEBI regulations require that not more than 5% of the fund should be invested in any one company.

Industry–specific:

Some mutual funds specialize in particular industry segments. They specify the industry or industries in which the fund is to be invested although the exact boundary line for an industry is not always easy to draw. The idea is to concentrate on some promising industries  expected to give superior returns. It should be borne in mind that the fortunes of particular industries are liable to much sharper and sudden changes than the broad economy.

Mid-cap funds:

As the name implies, these funds are meant to be invested in companies of “mediumsize”. There is no general definition of medium size.
Each such fund adopts its own definition, usually in terms of a company’s market capitalisation. They have emerged in recent years in the hope that relatively young, innovative and small-sized companies are likely to grow faster than the large and mature companies.

Index Funds:

Here, the portfolio composition is not decided by the fund manager but is given by a particular index, as announced at the time of
launching the scheme. The merits and demerits of index funds will be discussed in the next section at length.