What are Equity Mutual Funds

Explore more about what equity funds are, their types, and why you should invest in them.
3 mins read

Have you ever wondered how to tap into the exciting world of stock markets, but felt intimidated by the complexities of picking individual stocks? Enter equity mutual funds, a powerful tool that allows you to invest in a basket of carefully chosen company shares, without the hassle of managing them yourself.

In this article, we'll understand about equity mutual funds in detail, explaining their workings, benefits, and how they can potentially grow your wealth over the long term. Whether you're a seasoned investor or just starting out, this guide will equip you with the knowledge to decide if equity mutual funds are the right fit for your financial goals.

In this article, we will explore what equity funds are, their types, and why you should invest in them.

What are equity funds?

A mutual fund scheme that primarily invests in equity stocks is known as an equity fund. According to the current SEBI Mutual Fund Regulations in India, an equity mutual fund scheme must invest at least 65% of its assets in stocks and securities that are related to securities markets. An equity fund may be managed actively or passively. Passive management is used in index funds and ETFs.

Equity mutual funds are primarily categorised based on categorisation and investment style of the portfolio's holdings. Market capitalisation establishes an equity fund's size, and the stock holdings of the fund serve to classify equity mutual funds according to their investment approach.

How does an equity mutual fund work

Equity mutual funds unlock the world of stocks for investors. These funds pool money from many people and invest at least 60% of that total in company shares (equity). Any remaining amount can be used for cash-like investments or debt securities, depending on the fund's goals.

The fund manager steers the ship, choosing companies they believe will perform well. They can focus on companies with high growth potential (growth-oriented) or undervalued companies with room for price increase (value-oriented). Their goal? To maximise returns for you, the investor.

Features of an equity mutual fund



Investment type

Primarily invests in company stocks (equity)

Minimum investment

Relatively low compared to buying individual stocks

Professional management

Fund manager selects and manages the portfolio of stocks


Spreads investment across multiple companies, reducing risk


Units can be easily bought and sold on most exchange days

Potential for high returns

Stocks offer the potential for higher returns compared to other asset classes like bonds


Carries inherent investment risk due to stock market fluctuations


Management fees and expense ratios apply

Investment styles

Can be growth-oriented (targets high capital appreciation) or value-oriented (targets undervalued companies)


Net Asset Value (NAV) is calculated daily, providing transparency in fund value


Types of equity funds

There are several types of equity funds that investors can choose from, depending on their investment objectives:

  1. Large-Cap equity funds
    Large-cap equity funds invest in stocks of large-cap companies, which are top 100 stocks on the basis of market capitalisation listed on the stock exchange. These companies are comparatively stable and tend to provide resilience to market volatility.  Discover more about large cap mutual funds on ‘What are Large Cap Mutual Funds?’
  2. Mid-Cap equity funds
    Mid-cap equity funds invest in stock of mid-cap companies, which are listed on the exchange from 101 to 250 position on the basis of market capitalisation and have the potential to grow at a moderate pace and provide high returns. However, these funds come with relatively high risks. Discover more about mid-cap mutual funds on ‘What are Mid Cap Mutual Funds?’
  3. Small-cap equity funds
    Small-cap equity funds invest in stock of small-cap companies, which are listed on the exchange from 251 to 500 position and have the potential to generate high returns. These companies are highly risky and have the potential to witness significant growth in the long run. Discover more about small-cap mutual funds on ‘What are Small Cap Mutual Funds?’
  4. Multi-cap equity funds
    Multi-cap equity funds are diversified funds that invest in stocks of companies across all market capitalisations. They tend to balance the risk-return ratio due to diversified market-cap exposure. Discover more about multi-cap mutual funds on ‘What are Multi Cap Mutual Funds?’
  5. Sectoral equity funds
    Sectoral equity funds invest in stocks of companies from a specific sector, such as banking, IT, pharmaceuticals, etc. The returns of these funds are closely linked with the performance of the sector. Discover more about sectoral equity funds on ‘What are Sectoral Mutual Funds?’
  6. Thematic equity funds
    Thematic equity funds invest in stocks of companies from a particular theme, such as digital technology, clean energy, etc. These funds tend to carry a higher risk as they focus on a specific theme that may witness significant ups and downs. Discover more about thematic equity funds on ‘What are Thematic Mutual Funds?’
  7. International or global equity funds
    These funds invest in stocks of companies based outside the investor's home country, providing exposure to international markets and potentially diversifying investments across geographies. Discover more about International or global equity funds on ‘What are International Mutual Funds?’
  8. Index equity funds (passive funds)
    Index funds aim to replicate the performance of a specific stock market index, such as the Nifty 50 or S&P BSE Sensex. They don't rely on active management and tend to have lower expense ratios than actively managed funds.

Why invest in equity funds?

Listed below are some reasons for why invest in equity funds?

  1. Higher returns
    Investing in equity funds comes with the potential for high returns. Over the long run, equity funds have generated significantly higher returns than traditional investment options such as fixed deposits, savings accounts, and bonds. By investing in equity funds, investors can aim to earn long-term returns while beating inflation.
  2. Diversification
    Equity funds offer investors diversification across different sectors, companies, market capitalizations, and themes. By spreading their investments across different stocks, investors can manage the risk and achieve better investment returns.
  3. Liquidity
    Equity funds are highly liquid, meaning investors can easily buy and sell their funds on the stock market. This allows investors to take advantage of market trends and make investment decisions that align with their financial goals.
  4. Accessibility
    Equity funds provide an accessible entry point for investors who might not have the time, expertise, or capital to construct a well-diversified stock portfolio on their own. With a relatively low initial investment, individuals can gain exposure to a diversified basket of stocks through the fund.

How to invest in an equity mutual fund?

Before taking the plunge into the world of equity mutual funds, it's crucial to conduct a comprehensive evaluation of your financial objectives, risk tolerance, and investment timeline. To facilitate this process, we can categorise investors into two broad groups: newcomers and experienced investors.

  • For First-time equity fund investors
    Many individuals new to the investment scene often approach equity mutual funds as a practical choice. This is often due to limited initial capital (common among younger investors), a lack of time for constant investment monitoring (a necessity for direct stock investments), or a shortage of expertise in stock selection. In such cases, equity mutual funds emerge as an attractive option. Nevertheless, it's worth noting that there exists a variety of equity funds, making the selection process somewhat challenging. New investors can consider Large-Cap Equity Funds. These schemes primarily channel investments into top-notch market companies with a track record of delivering consistent returns.
  • For the experienced investors
    For experienced investors it is encouraged to explore diversified equity funds and take calculated risks. The understanding of the market is significantly important in selecting the most suitable scheme and achieving superior returns compared to other equity fund options.

Who should invest in equity mutual funds?

Equity-oriented funds are the funds with at least 65% equity holdings, considered for tax computation. Here are the types of investors who should invest in equity mutual funds:

  1. Busy investors: Provides stock market exposure without needing time for research or market tracking; managed by professionals.
  2. Small investors: Allows starting with amounts as low as Rs. 100.
  3. Long-term goals: Suitable for investors with goals over 5 years, like retirement or children's education.
  4. Tax-saving and wealth growth: ELSS, a type of equity fund, offers tax benefits under Section 80C while providing good returns.

Tax on equity mutual funds

Understanding the taxation of dividends and capital gains in equity funds is essential for investors. Here is a concise overview:

  • Dividends and capital gains from equity funds are subject to taxation. Capital gains represent the difference in purchase and redemption prices of mutual fund units.
  • Opting for the dividend plan of the equity fund allows investors to receive dividends when surplus corpus is available.
  • Dividend earnings are added to the investor's income and taxed based on their income tax slab, ranging from 20% to 30%.
  • Capital gains taxation depends on the holding period. Short-Term Capital Gains (STCG) tax at 15% applies if held for less than 12 months.
  • Long-Term Capital Gains (LTCG) tax at 10% applies if held for more than 12 months, exceeding Rs. 1 lakh.

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Frequently asked questions

Is it good to invest in equity funds?

Investing in equity funds can offer higher potential returns but comes with some level of risk. It's suitable for individuals seeking long-term wealth accumulation but should be done with a well-thought-out strategy.

Who should invest in Equity Mutual Funds?

Equity mutual funds are ideal for investors with a higher risk tolerance, a long investment horizon, and a goal of capital appreciation. They are not suitable for risk-averse investors.

What are the benefits of investing in Equity Funds?

Benefits include the potential for high returns, professional management, diversification, and liquidity. However, they also carry market risk, so investors should be prepared for volatility.

What are the different categories of Equity Funds?

Equity funds can be categorized based on market capitalisation (large-cap, mid-cap, small-cap), investment style (value, growth), and sectors (technology, healthcare, etc.). Each category has a different risk-return profile.

What is the difference between equity mutual funds and stocks?

Equity mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, managed by professional fund managers. Stocks, on the other hand, represent ownership in individual companies and are traded on stock exchanges, offering direct ownership but higher risk.

What is equity and SIP?

Equity refers to ownership in a company, represented by shares or stocks. SIP (Systematic Investment Plan) is a method of investing in mutual funds, including equity funds, where investors regularly invest a fixed amount at predefined intervals, promoting disciplined investing.

Which is better mutual fund or equity?

The suitability of mutual funds or direct equity depends on individual risk tolerance, investment goals, and expertise. Mutual funds offer diversification and professional management but with fees, while direct equity provides direct ownership but requires research and monitoring.

What is the difference between ETF and equity mutual fund?

Both invest in stocks, but ETFs trade like stocks on exchanges throughout the day. Equity mutual funds are priced and purchased/redeemed at the end of each trading day.

Is an equity mutual fund safe?

Diversification reduces risk, but equity funds still involve inherent investment risks from stock market fluctuations.

Why is it called an equity fund?

"Equity" refers to ownership in a company (stocks). Equity funds invest a majority of their assets in company stocks.

Can I withdraw equity mutual funds?

Yes, you can typically redeem your shares at the end of the trading day, but there may be fees or exit loads.

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