Types of Equity Mutual Funds You Should Know Before Investing
Summary
Investing has moved beyond just safety. People now seek growth with purpose. Equity mutual funds offer that possibility. They invest in company shares for long-term returns. Different types follow different strategies and needs. Choosing the right one depends on your objectives. This blog breaks it down each type simply and clearly. So you invest not just for returns, but with direction.
Introduction
Not too long ago, most investors in India stuck to the familiar—gold, fixed deposits, and recurring deposits. These options felt safe and predictable, but they often struggled to outpace inflation or build substantial wealth.
Today, the mindset is shifting. More people are open to exploring new ways to invest. They want their money to work harder and smarter. They’re thinking beyond saving—they’re thinking about growing wealth, aligning investments with personal needs, and matching them to their comfort with risk.
That’s where market-linked investments come in. They don’t promise fixed returns, but they can offer powerful long-term potential. And among them, equity mutual funds are often the first choice.
In this blog, let’s explore in depth what equity mutual funds are and what are their different types.
What are Equity Mutual Funds?
Equity mutual funds invest in the shares of companies listed on the stock market. Their aim is long-term growth, and not quick profits. By harnessing the growth potential of the market, these funds aim to build value over time. Since stock prices fluctuate daily, the value of equity mutual funds can also rise and fall in the short term. This makes them more suitable for investors who can stay patient, tolerate some volatility, and keep a long-term perspective.
Equity mutual funds are categorized based on their investment strategy and the types of companies they invest in. This helps investors align their choices with their personal financial needs and risk appetite. The main categories include:
Based on Market Capitalisation
- Large-Cap Funds: Large cap funds invest in well-established companies. These companies are ranked in the top 100 by market capitalization. They are usually stable and financially strong. Their shares are traded frequently and are less volatile. A large cap fund invests at least 80% of its assets in large-cap stocks. These funds aim for steady returns with lower risk. They are suitable for investors seeking consistency and long-term growth. They often form the core of many investment portfolios.
- Mid-Cap Funds: Mid cap funds invest in medium-sized companies. These are companies ranked 101 to 250 by market capitalization. They are more volatile than large caps but offer better growth potential. In these funds, at least 65% of the fund’s money goes into mid cap stocks. These companies are often in the expansion stage. They may grow faster than large caps but are more affected by market swings. These funds suit investors who want higher returns and can handle some risk. Investors who invest in mid cap funds need a medium to long-term investment horizon.
- Small-Cap Funds: Small cap funds invest in smaller, emerging companies. They focus on companies ranked 251 and beyond by market capitalization. These businesses have high growth potential but come with higher risk. At least 65% of the fund must be in small cap stocks. Their stock prices can be more volatile than large-cap and mid-cap stocks. They can offer strong returns if the companies perform well over time. These funds are suitable for experienced investors who can handle volatility. A long-term view is important to ride out market ups and downs for the investors of small cap funds.
- Multi-Cap Funds
Multi cap funds invest across stocks of different sectors and segments of the market. This mix helps balance risk and return in the portfolio. As per SEBI rules, they must invest at least 25% each in large, mid, and small caps. The remaining portion can be allocated flexibly. This structure ensures diversification across company sizes. These funds are good for investors who want broad market exposure. They offer a mix of growth, stability, and opportunity.
- Flexi Cap Funds: Flexi cap funds also invest across large, mid, and small caps. But they do not follow fixed percentages for each category. They must invest at least 65% in equities overall. Fund managers have complete freedom to shift between caps. Allocation changes based on market trends or growth potential. This flexibility allows the fund to adapt quickly to conditions. Returns may vary depending on the manager’s decisions. They suit investors looking for dynamic, actively managed funds.
- Large & Mid Cap Fund: Large & mid cap funds invest in both large and mid-sized companies. They must put at least 35% each in large cap and mid cap stocks. This creates a balance between stability and growth potential. Large caps add strength and consistency. Mid caps add higher growth opportunities.These funds are good for investors who want a mix of safety and growth. They need a medium to long-term investment horizon.
Based on Investment Style
Another way to classify equity funds is by their investment style, which reflects the strategy the fund manager uses to pick stocks.
- Dividend Yield Funds: This fund invests in companies that regularly pay dividends. In dividend yield funds at least 65% of the fund is invested in equity stocks. These companies are usually stable and generate steady profits. Investors may earn through both dividends and capital appreciation. Such funds can offer regular income and moderate growth. They are suitable for conservative investors who prefer stability.
- Value Funds: Value funds invest in undervalued companies. These are businesses trading below their true or intrinsic value. Fund managers look for strong fundamentals and ignored potential. The idea is to buy low and wait for value to be recognized. SEBI requires these funds to invest at least 65% in equity instruments. Returns may take time, depending on when the market catches up. Value investing requires patience and trust in long-term performance. It suits investors who can wait through short-term underperformance.
- Contra Fund: Contra funds follow a contrarian strategy. They invest against current market sentiment. They buy stocks or sectors that are currently out of favor. The belief is that these stocks will bounce back over time. At least 65% must be in equity instruments. These funds go against the crowd and focus on long-term gains. They often avoid trending or overvalued stocks. Best suited for investors with a long-term mindset and high risk tolerance.
- Focused Fund: Focused funds invest in a limited number of companies (maximum 30) across any market cap. This makes the portfolio concentrated and high-conviction. At least 65% of these funds are invested in equity instruments. The aim is to focus only on the best investment ideas. This can lead to higher returns if the chosen companies do well. Ideal for investors confident in the fund manager’s skill.
Based on Sector or Theme
These funds are for investors who want to bet on a specific part of the economy or a particular trend.
- Sectoral and Thematic Funds: These funds invest in a specific sector or theme. For example, technology, banking, pharma, or infrastructure. A thematic fund may cover multiple sectors under one idea, like ESG. They must invest at least 80% in stocks matching that sector or theme. They can deliver high returns when the sector performs well, but they also come with increased risks. These funds suit experienced investors who understand sector cycles.
Other Important Types
ELSS Equity Linked Saving Scheme: ELSS is a tax-saving mutual fund under Section 80C. It allows a deduction of up to ₹1.5 lakh per year from taxable income. The fund invests at least 80% in equity instruments. It comes with a 3-year lock-in period, which is the shortest among tax-saving options. Investors get both tax benefits and potential for long-term returns. Even after lock-in, staying invested longer can improve gains. It suits salaried or tax-paying individuals looking to grow wealth with tax savings.
Conclusion
Mutual funds offer more than just variety; they offer direction. Whether you want steady growth, lower risk, or focused strategies, there's a fit for you. But too many options can also feel overwhelming. That’s where guidance plays a key role. A mutual fund distributor helps you sort through the noise. They understand your needs, risk comfort, and how long you want to invest. With their help, you avoid guesswork and build a thoughtful portfolio. You still make the decisions, but with better clarity. In investing, knowing where to begin is just as important as knowing why. So take your time, ask questions, and don’t hesitate to seek guidance. Because the right fund is not just about performance, it’s about purpose.
Mutual Fund investments are subject to market risk, Read all scheme related documents carefully.