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The Beginner's Guide to Equity Mutual Funds: What They Are and How They Work

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May 8, 2023


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Have you finally decided to invest in mutual funds? Right since their inception, mutual funds have become a preferred investment tool for many. Even so, choosing the right mutual fund scheme is difficult due to the vast array of choices available. Not to mention investment demands a well-thought plan to avoid potential risks and losses.

Hence, it is essential to understand the basics of the different schemes available. Here you will learn what is equity mutual fund, including what are equity mutual funds SIP and how these funds exactly work.

What Do You Understand by Equity Mutual Funds?

An equity mutual fund is a type of mutual fund that invests mostly in shares or equity stock of companies. It is a great pick to invest for a long period and for those wanting to gain exposure to the stock market.

You can invest in two ways with either a lump sum or a SIP investment plan.

Lumpsum investment is when you invest the whole amount in one go. Equity mutual funds SIP investment is an investment of a fixed amount at regular intervals.

How do the Equity Mutual Funds Work?

In an equity mutual fund, you or the fund manager invests a major corpus, i.e., more than 60% of its total assets in the equity stocks of various companies. This allocation is made after carefully considering the equity fund scheme and its alignment with your financial goals.

Additionally, the balance amount is invested in debt securities or money market instruments. Doing this generally reduces the risk involved and takes care of sudden requests for redemption.

Here are the different types of equity mutual funds:

  • Small-cap equity funds invest around 65% in stocks of smaller-sized companies. Though they offer relatively higher returns than mid and large-cap, these funds are riskier.
  • Medium-cap equity funds involve investment in companies that rank between 101 and 250 by their whole market capitalisation. They support higher returns but are riskier compared to large-cap.
  • Large-cap equity funds are invested in many companies with higher market capitalisation. These funds offer better stability and sustainable returns over a period.


Equity mutual fund schemes invest your money in equity stocks via lump sum or SIP investment plan. Such funds may be small-cap, mid-cap, or large-cap, depending on the organisations they invest in. If you're interested in digging deeper, Fi is the perfect financial management gateway to invest in India's best equity mutual funds. Its smart interface makes it easy to use by seasoned investors or novices. Packed with 800 mutual direct mutual funds, you can invest monthly, weekly, or daily.

Frequently Asked Questions

1. What is an equity mutual fund, and how do they work?

Equity mutual funds are investments made in large proportions in the stocks of various companies to generate higher returns. After researching the equity mutual fund and how well it aligns with your investment objectives, this investment is made.

2. What are the benefits and risks of equity mutual funds, and how can investors manage these risks?

Equity funds investment is professionally managed and offers diversification in investment. Moreover, you require a small amount of capital to invest and can expect higher returns. Even so, the stock market is volatile, so equity fund investment is linked to higher risk than other mutual funds.

Fund managers do try to minimise these risks by creating a diversified portfolio.

3. What are the different types of equity mutual funds, and how do they differ from one another?

Equity mutual funds can be categorised into three types large-cap, mid-cap, and small-cap equities. Large-cap involves investment in companies with higher market capitalisation. Mid-cap involves investment in companies placed 101-250th while small cap in companies falling below 250 per market capitalisation.

4. How can investors analyse and select equity mutual funds to invest in, and what factors should they consider?

A first-time investor is often recommended to invest in large-cap equity mutual funds. These typically invest in the shares of the top companies and provide consistent returns. Additionally, you need to acquire knowledge of the stock market, conduct research, and consider your investment goals before making any decision.


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.
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