0 hidden charges. 0 forex

Equity Mutual Funds - Basics, Types, Benefits and More

Reviewed by
Created on
July 9, 2022


What’s Inside

A mutual fund is an investment platform where various investors pool their money together to achieve a common investment goal. There is a fund manager for each mutual fund who then utilises all this money to invest in equities. As the name suggests, the profit and loss earned in mutual fund investments are shared by all the investors involved. The higher the percentage invested, the higher the profit, and vice versa. 

Now, let's focus on what an equity fund is!

What exactly is an Equity Fund?

Equity fund investment means investing in the stocks of a company. In layman's terms, an equity fund is a type of mutual fund. It is a bit risky as compared to mutual fund investments. Equity funds are also referred to as stock funds because they principally deal in stocks. If you are looking for a long-term wealth creation investment plan, investing in equity funds can be your ideal choice. 

How many Types of Equity Funds are Available? 

Equity funds require your utmost patience. In the short term, the returns on equity investment may suffer turbulence, which is when you must be patient. Withdrawing money during lows can only bring you loss. Keeping your money invested for at least 4-5 years is when you’ll start reaping the benefits. But before you start investing, it is essential that you also understand the various types of equity investments. 

On various grounds, equity funds are divided as:

Based on market capitalisation

The following are the types of equity funds depending on the market capitalisation invested by the companies

  • Large Cap

It involves companies with the largest market capitalisation that offers comparatively stable returns.

  • Mid Cap

Companies that have lesser market capitalisation as compared to large caps. However, they offer a higher return as compared to large-cap companies. 

  • Small-Cap

It refers to the companies other than those in the list of top 250 companies on the stock market. They may offer higher returns but also include high risk. 

Based on diversification 

When it comes to the diversification of the equity funds, there are different varieties to it, like

  • Multi-Cap 

It is a type of investment where the investors invest in different sectors of all sizes. 

  • Focused 

Focused equity investment involves investment in specific industries with a concentrated portfolio. 

  • Value-Oriented

It focuses on stocks that are currently offering discounts but have long-term investment potential. 

  • International

Such investments are focused on the leading equity funds across the globe. 

Based on sector and themes

These are types of equity funds based on themes and sectors. Thematic funds focus on a set of industries with a particular theme like digital, steel, energy, etc. On the other hand, sector themes are not as wide as compared to thematic ones. Sectoral equities focus on specific sectors like pharma, banking, IT, etc.

  • Thematic Dividend Yield - It refers to the dividend-paying stocks. 
  • Thematic Energy - Here, the investor prefers investing in energy stocks. 
  • Thematic PSU - All the PSU stocks are taken into consideration under Thematic PSU. 
  • Thematic MNC (Multi-National Companies) - The MNC stocks come under this category. 
  • Thematic - As the name suggests, it refers to a specific theme-based investment. 
  • Thematic ESG (Environmental, Social and Governance) - All the top-rated ESG thematic funds in India come under Thematic ESG. 
  • Thematic Consumption - It refers to the equities that are united to a single theme. It can be steel, power, infrastructure, etc. 
  • Sectoral Infrastructure - A type of equity fund that only includes infrastructure stocks. 
  • Sectoral Technology - All the technology stocks are dealt with under this equity investment. 
  • Sectoral Banking - The banking stocks come under this type of equity fund investment. 
  • Sectoral Pharma - The pharma stocks are considered for investment under sectoral pharma. 

Benefits of Investing in Various Types of Equity Funds

Whether you are a beginner or a professional, there are some basic advantages of equity funds that you will enjoy when investing in them.

Let's have a look at the benefits of equity mutual funds.

1. Distribution of Risks 

The equity mutual funds are spread across, and investments are made in multiple stocks of different sectors. This diversifies the risks arising out of the investment. If any particular stock underperforms, it is easily covered up by the stocks performing well. This advantage leads to getting good returns overall.

2. Fund Manager

Expert Fund Managers are professionals appointed by the fund houses to manage the mutual funds. Their main job is to manage funds to generate profit at all costs. They are experts in managing money and are assisted by a team. They are well aware of how to identify the best return-generating funds.

3. Variety of Investment Options

Investors are provided with a wide range of choices to invest in. One can invest in equity, gold, debts, liquid assets, etc. Investors can choose according to their needs and risk capacity. They are also given additive options to choose from a wide range of options within the specific asset class, like small and mid-cap funds under equity funds. This leads to a reduction in the risks significantly.

4. An Ideal Choice for Long-Term Investment

Equity funds are one of the best options for fulfilling your long-term financial goals. Investors can easily chalk out a plan to invest systematically as per their needs. A good, efficiently planned investment for the long run is sure to give back a good return.

Taxation in Equity Mutual Funds

Taxation on Equity mutual funds depends on several factors, like the type of equity fund, the tenure of your investment and the type of gains you received. 

There are broadly two types of gains, dividend (the profit made through investing in a scheme) and capital gains (profit made by selling your capital asset). On both of these gains, taxes are levied. 

Dividend gains exceeding ₹5000 in a financial year are charged 10% tax. On the other hand, if your capital gain exceeds ₹1 lakh in a financial year, it is taxable. For short-term capital gain (STCG), there is a 15% tax, and for long-term capital gain (LTCG), there is a 10% tax. Hence, the longer you remain invested, the lesser tax you pay. 

Essentials To Understand Before Investing In Mutual Funds

There are a few essentials that you must keep in mind while investing. Read the pointers below to understand in detail-

  • Plan as per your risk appetite

You will be bearing the risk depending on the type of equity investment. So, you must analyse your risk appetite before making a new investment in the stock market or mutual fund. If you are a beginner, you can begin with low-risk investments and gradually widen your risk appetite. 

  • Decide on a financial goal

Some people tend to invest for a particular financial goal they wish to achieve in the future. If you are also one of them, then take a break, sit with a pen and paper and note down your goals. Accordingly, you will have to decide the type of investment and the time you can give for it to grow. 

  • Choose direct plans over regular plans

This is one crucial decision you need to make. Under a regular plan, your investment is planned and executed by a fund manager. So, you also have to pay the commissions. Under a direct plan, you do everything from your end, from researching to choosing the type of equity investment and finally investing. Hence, you pay no extra commission to anyone. 

  • Patience is key

You must understand that mutual funds are not intraday trades where you can make instant profit. In order to make an exceptional profit, you have to stay invested for 3-5 years or more. So, make sure you have that much time. 

  • Try focusing on long-term plans

You may choose any plan you wish to. However, to make a maximum profit under mutual funds, it’s advisable to choose long-term plans. 

  • Check the AMC’s performance

There are so many Asset Management Companies to choose from before investing. Hence, you must read the performance history, market reviews, and potentiality of the particular AMC before finalising it. 

  • Invest in exit load-free schemes

Some of the equity mutual fund schemes may charge you an exit load. So, if you are not 100% sure you can stay invested for the long term, make sure you go with a scheme that does not charge any exit load. 

  • Your fund manager makes a huge difference

The fund manager makes a big difference in your investment returns. It is the fund manager who is ultimately going to do the research and invest and decide the advantages of mutual funds you are going to make. So, choose wisely. 

Investing in Equity Mutual Funds - Learn these Terms

Here are some commonly used terms in the world of mutual and equity fund investments. To ease your understanding, we have mentioned a few here-

  • AMC - AMC stands for Asset Management Company. An AMC is responsible for managing the mutual funds and investing them per the investors' objective. 
  • Account Statement - Like a bank statement, an account statement of a mutual fund refers to the account details of an investor and all the transactions executed in that particular account over a period. 
  • Corpus - A corpus refers to the total investment made by all the investors in a company under a scheme. For instance, XYZ company had a total of ₹13 crore corpus as of 31st March 2022.
  • Exit Load - It is the penalty charged to an investor for withdrawing a mutual equity fund before maturity. 

In conclusion

Equity funds are a good option if you’re looking for high returns. But you also need to be mindful of the risks that it brings with them. The best way you can maximise out of investing in equity mutual funds is by staying invested for as long as you can with a minimum period of 3-5 years. It’s a game of patience and the adage of “patience is a virtue” will hold true for you as an investor.

Invest Via Fi in Mutual Funds

Mutual Fund investments on Fi are simple & commission-free. With its intuitive user interface, suited for new & seasoned investors, one can select from over 900 direct Mutual Funds. Plus, Fi is 100% secure as it functions under the guidance of epiFi Wealth, a SEBI-registered investment advisor. To help simplify the steps involved, you can invest daily, weekly, or monthly via automatic payments or SIPs — created with one tap. Moreover, Fi offers 100% flexibility with zero penalties for missed payments.

Frequently Asked Questions

1. Is it safe to invest in an Equity fund?

Mutual funds perform best when you stay invested for the long term. You have the option for short-term investments as well. Although they have high risk, they also offer high returns. However, the chances of suffering loss become negligible when you stay invested for longer. So, you can say that long-term equity fund investment is quite a safe option. 

2. What is the minimum amount to invest in Equity funds?

There are various AMC that offer equity fund investment options. Depending on the companies, the minimum investment amount may vary. However, on a major ground, the minimum equity fund investment amount can be as low as ₹100.

3. How to invest in equity mutual funds?

An investor can choose either an online or offline method of investing in equity mutual funds. Here is the process-

Online Process

  • Visit the nearest office of a fund house.
  • Fill out the mutual fund investment form with all the details 
  • Submit the form along with the required documents and pay the amount

Online Process

  • Choose the mutual fund you want to invest in
  • Visit their official website
  • Fill out the form for the equity investment
  • Complete the KYC process
  • Submit the form along with the documents and make the payment

You can also invest via mobile applications of your preferred AMC or third-party applications. 

4. Can we withdraw Equity funds anytime?

Yes. You can withdraw your invested money from equity funds anytime you want. However, an exception is the ELSS (Equity Linked Savings Scheme) which has a lock-in period of 3 years. Under any circumstances, the money invested in an ELSS equity fund cannot be withdrawn before three years. Also, some equity fund schemes may ask for an exit load for withdrawing before maturity. 

5. Is there any tax on Equity Funds?

The profit earned through equity fund investment is taxable. Tax is charged on both dividends and capital gains. Earlier the dividend was tax-free, but now, as per the amendments, dividends are also taxable as per the investor's tax slab. Short-term capital gains are charged with 15% tax, and long-term gains beyond ₹1 lakh attract 10% tax.

6.How many types of equity funds are there?

There are several types of equity funds in India, some of the main types are:

a. Large-cap funds: These funds invest in large and well-established companies that have a market capitalization of over Rs.10,000 crores.

b. Mid-cap funds: These funds invest in companies that have a market capitalization between Rs. 2,000 crores and Rs. 10,000 crores.

c. Small-cap funds: These funds invest in companies that have a market capitalization of less than Rs. 2,000 crores.

d. Value funds: These funds invest in companies that are undervalued by the market and have a lower price-to-earnings ratio.

e. Growth funds: These funds invest in companies that are expected to grow at a faster rate than the market.

f. Sectoral funds: These funds invest in specific sectors, such as technology, healthcare, or real estate.

g. Index funds: These funds track a specific market index, such as the Nifty 50 or the BSE Sensex.

h. Tax-saving funds: These funds, also known as Equity-Linked Savings Scheme (ELSS), are equity-oriented mutual funds that provide tax benefits to investors.

i. International funds: These funds invest in the stock of companies listed outside India.

7. Which type of equity mutual fund is best?

Equity funds, like other investment options, are subjective to your investment goals. The best fund for you would be the one that suits you best. When choosing an equity mutual fund, it's important to consider your investment goals, risk tolerance, and time horizon. Different types of equity mutual funds have different characteristics and may be better suited for different investors.


Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
Share this article
Copied Link!
Equity Mutual Funds - Basics, Types, Benefits and More


View similar articles in
Get the Fi app