What Are the Various Types of Equity Funds and How They Work?

With India’s equity markets expanding at an impressive pace, with more retail participation joining the race each year, the need to get familiar with equity-based investment products has never been more crucial. Investors are increasingly looking at equity-based investment products, such as equity mutual funds, as an alternative to traditional savings and as a structured pathway to long-term wealth creation. However, investing in mutual funds is far more nuanced than simply investing in a suitable equity mutual fund. Each equity fund category is designed with a specific purpose, guided by different market behaviours, investment horizons and growth expectations.

Table of Content

• What is the Meaning of Equity Funds?
• Types of Equity Mutual Funds
• How Equity Mutual Funds Work?

Whether an investor chooses to invest in equity funds through SIPs or a one-time contribution, understanding the fundamentals of these investment tools is the first step to building a resilient portfolio. With this clarity, investors will be better equipped to analyse which fund category aligns with their financial goals and overall risk tolerance.

What is the Meaning of Equity Funds?

Equity funds are mutual funds that primarily invest in stocks of companies listed on the stock market. Most investors choose to invest in equity funds to reap long-term capital appreciation by participating in the growth of these businesses. Since the returns depend on market performance, equity funds are known to carry higher risk compared to their counterparts, like debt funds. However, it offers higher growth potential over longer periods compared to other investment tools.

Types of Equity Mutual Funds

Large-Cap Equity Funds

Large-cap funds primarily invest in India’s top 100 companies by market capitalisation. These topmost companies have the reputation of being well-established, financially sound and a proven track record of navigating market cycles. Because of this, large-cap funds offer relatively steady returns and lower volatility when compared to other types of equity funds. Large-cap equity mutual funds are best suited for investors who prefer consistency and want to benefit from long-term capital appreciation without taking excessive risk.

Mid Cap Equity Funds

Mid-cap equity funds invest in companies ranked between 101 and 250 by market capitalisation. These companies generally fall in the high-growth phase of their business journey, established enough to provide some stability but still agile enough to deliver strong performance during favourable market conditions. Investors with a medium to long-term horizon and a willingness to navigate fluctuations often find this category of equity funds to be a favourable investment option.

Small Cap Equity Funds

Small-cap equity funds focus on companies ranked 251 and beyond, many of which operate in niche sectors or highly emerging sectors in the Indian economy. These businesses have the potential to grow rapidly, especially in expanding economic conditions, making small-cap funds capable of delivering significant long-term returns. However, they also carry the highest level of volatility due to their size and sensitivity to market conditions.

Multi-Cap Equity Funds

Multi-cap equity funds are designed to maintain a diversified portfolio across large, mid and small-cap companies, with mandatory minimum allocations to each category. This structure ensures a balanced spread of returns and risk, as the performance of one segment helps offset volatility in another. Investors seeking broad exposure to the equity market without relying too heavily on any single segment usually prefer investing in multi-cap equity funds.

Flexi Cap Equity Funds

Similar to multi-cap, flexi-cap funds also invest across companies of varying sizes, but they do not follow any fixed allocation rules. Fund managers have complete flexibility to shift investments based on certain market conditions, like emerging trends or opportunities that offer better returns or growth potential. The type of equity funds is ideal for investors who prefer professionally guided market responsiveness.

ELSS (Equity Linked Savings Scheme)

ELSS funds are equity-oriented schemes that offer tax benefits under Section 80C while providing investors with exposure to the stock market. With a mandatory 3-year lock-in period, ELSS funds are the shortest among all tax-saving instruments, and they encourage investors to stick to disciplined investing. The type of equity fund is designed for individuals who wish to combine tax efficiency with long-term wealth creation.

Suggested Read: EQUITY LINKED SAVING SCHEME (ELSS) MUTUAL FUNDS & ITS TAX BENEFITS

How Equity Mutual Funds Work?

Pooling of Money

Equity mutual funds gather money from multiple investors and create a common investment pool.

Professional Management of Funds

Next, a skilled fund manager invests this pool of funds into a diversified portfolio of stocks based on the fund’s objectives.

Investment Strategy

Each fund follows a defined investment strategy, such as investing in different types of equity funds, such as large-cap, mid-cap or a mix of all.

Unit Allocation

When an investor puts in money through SIP or a lump sum, it is converted into units at the prevailing Net Asset Value (NAV).

NAV Movement

NAV is bound to fluctuate daily based on market conditions and the performance of the underlying stocks, which in turn affects the investor’s overall returns.

Wealth Creation

Over a period of time, market appreciation, dividends and compounding work together to help investors build long-term wealth. 

Suggested Read: Understanding How Mutual Funds Work: A Complete Guide

If you are exploring how equity mutual funds work, Muthoot Finance brings decades of financial expertise to help investors choose the right equity funds with clarity and confidence. With trusted support, seamless investment process and flexible options to invest through SIP or lump sum contributions, Muthoot Finance ensures that every investor can make informed decisions and build long-term wealth. By exploring the wide range of mutual fund solutions, Muthoot Finance lets investors take a decisive step toward a stronger and more rewarding financial future.