What are Equity Mutual Funds?

Published on March 10, 2026 | 4 min read

Equity mutual funds are popular investment options in India for investors looking to grow their wealth over a long period of time. These funds mainly invest in shares of listed companies, allowing you to participate in the stock market without directly investing in stocks.

You can easily start investing with a small amount through SIPs or invest in a lump sum, depending on your financial goals. Understanding what equity mutual funds are and how to invest in them can help you to take the first step toward disciplined and long-term investing.

Key Takeaways

Equity mutual funds invest in listed stocks, offering potential for long-term capital growth.
They come in various types based on different categorisations.
Key benefits include professional management, diversification and liquidity.

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Understanding Equity Mutual Funds

Equity mutual funds are those funds which allocate money to stocks of publicly listed companies. These funds pool money from investors and invest it to buy shares in companies across various sectors, and look for capital appreciation through growth in the stock market.

Equity funds invest in various companies operating in different sectors to lower the overall risk in the portfolio and generate consistent returns on a CAGR basis.

Features of Equity Mutual Funds

The following features of equity mutual funds make them a popular choice for investors.

Market-Linked Returns

Usually, the fund performance is linked to the stock market. If the stock market performs well, equity funds are expected to do well.

Diversification

Equity mutual funds invest in various sectors, which helps in diversification.

Liquidity

Most equity mutual funds allow investors to redeem their units anytime, which offers liquidity.

Systematic Investment

Investors get an option to do SIPs, allowing regular investment with a fixed amount, which helps in averaging out the purchase cost.

Types of Equity Mutual Funds

Equity mutual funds are categorised into several types:

1. Categorisation Based on Market Capitalisation

Large-Cap Funds: These funds invest 80% of their assets under management (AUM) in large-cap stocks, which have a market capitalisation of ₹20,000 crore or more.
Mid-Cap Funds: It allocates atleast 65% of AUM into mid-cap stocks, which have a market capitalisation between ₹5000 crore and ₹20,000 crore.
Small-Cap Funds: It invest atleast 65% of AUM in small-cap stocks, which have a market capitalisation of below ₹5,000 crore.
Multi-Cap Funds: It allocates 65% of AUM across large, mid and small-cap stocks in varying proportions. The fund manager actively rebalances the portfolio to generate higher returns.
Large and Mid-Cap Funds: In this, the fund manager allocates 35% of AUM in both large-cap and mid-cap stocks to offer stability and growth.

2. Categorisation Based on Investment Strategy

Sectoral Funds: These funds invest in particular sector companies like the banking sector, the FMCG sector, the IT sector, etc.
Thematic Funds: These funds invest in specific investment themes such as emerging markets, electric vehicles (EV), and green energy themes, etc.
Focused Equity Funds: These funds invest in a concentrated portfolio of up to 30 stocks, selected based on market capitalisation at the time of scheme launch.

3. Categorisation Based on Investment Style

Active Funds: The funds are actively managed by the fund managers, and stocks are selected based on market research and analysis.
Passive Funds: These funds track a specific market index, such as Nifty50 or Sensex, and fund managers invest based on it.

4. Categorisation Based on Taxation

Equity-Linked Savings Scheme (ELSS): These equity funds are popular because they get deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act.
Non-Tax Saving Equity Funds: All other equity funds that do not provide tax benefits under Section 80C fall under the Non-Tax Saving category. The returns are subject to capital gain tax.

Factors To Consider When Investing in an Equity Mutual Fund

Before investing your money in equity mutual funds, it's essential to consider key factors:

Risk

Investing in the stock market carries risk. Equity funds are linked to the stock market, so if the broader market falls, the returns of equity funds can be negative in the short term.

Past Performance

Historical performance can provide insight, but does not guarantee any future returns.

Expense Ratio

All mutual funds have an expense ratio, which covers the fund’s operating expenses. It is essential to compare expense ratios across other funds because a higher expense ratio can affect the overall returns.

Advantages of Investing in Equity Mutual Funds

Equity mutual funds offer multiple benefits to the investors:

Growth Potential

These funds often beat the returns of traditional savings accounts or bonds. Equity mutual funds had the potential to generate wealth over a long-period of time and fulfil your goals.

Affordability

Investing in equity mutual funds is also possible for low-income earners, due to their affordability. You can start investing with just ₹100 in selected funds.

Professional Management

The funds are managed by market experts and skilled professionals.

Equity mutual funds are a suitable investment option for those looking to participate in the market without being actively involved in it. These funds provide diversification, professional fund management, and liquidity, making them ideal investments for long-term investors.

Choosing the right mutual funds can help to beat inflation and achieve your long-term goals.

About Author

Subhasish Mandal

Sub-Editor

finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.