Equity mutual funds are one of the most popular investment avenues in India for individuals seeking long-term capital appreciation. If you’re looking to grow your wealth and beat inflation over the long term, equity mutual funds might be the right fit. But before you invest, it’s essential to understand the different types of equity mutual funds, how they work, and what kind of returns you can expect.
What are Equity Mutual Funds?
Equity mutual funds primarily invest in shares (equities) of publicly listed companies. These funds aim to generate returns through capital appreciation and, in some cases, dividends.
To qualify as an equity fund under SEBI guidelines, at least 65% of the portfolio must be invested in equities and equity-related instruments.
Types of Equity Mutual Funds
The categorization of equity mutual funds is primarily based on market capitalization, investment style, and sector exposure. Here’s a breakdown:
1. Large-Cap Funds
- Investment Focus: Top 100 companies by market capitalization (as per SEBI).
- Risk Level: Moderate
- Suitability: First-time investors and conservative equity investors.
- Returns: Returns might be similar to the index as it consists of blue chip companies.
- Example: Nippon India Large Cap Fund, ICICI Prudential Bluechip Fund
2. Mid-Cap Funds
- Investment Focus: Companies ranked 101 to 250 by market cap.
- Risk Level: Higher than large-cap, but potential for better returns.
- Suitability: Investors with moderate to high risk tolerance and a long-term horizon.
- Returns: Returns are usually higher than large cap funds as they undertake more risk.
- Example: Kotak Emerging Equity Fund, Axis Midcap Fund
3. Small-Cap Funds
- Investment Focus: Companies ranked beyond 250 in market capitalization.
- Risk Level: Very high
- Suitability: Aggressive investors who can withstand volatility.
- Returns: Returns are very high but can incur significant losses too.
- Example: SBI Small Cap Fund, Nippon India Small Cap Fund
4. Multi-Cap Funds
- Investment Focus: A diversified mix across large, mid, and small-cap stocks. There is a fixed allocation in it. Large cap (25%), Mid cap (25%), Small cap (25%) and the rest 25% can be allocated at the managers discretion.
- Risk Level: Moderate to high
- Suitability: Investors seeking balanced exposure.
- Returns: Usually similar to flexi cap funds.
- Example: Parag Parikh Flexi Cap Fund, UTI Flexi Cap Fund
5. Flexi-Cap Funds
- Investment Focus: No fixed allocation – fund manager has flexibility.
- Difference from Multi-Cap: Multi-caps require a minimum 25% in each category; Flexi-caps do not.
- Historical Returns: Returns vary according to the risk undertaken by the fund manager
- Example: SBI Flexi Cap Fund, HDFC Flexi Cap Fund
6. ELSS (Equity Linked Savings Scheme)
- Investment Focus: Equity investments with a tax-saving benefit.
- Lock-in Period: 3 years (shortest among tax-saving instruments).
- Suitability: Investors looking for tax deduction under Section 80C.
- Returns: Returns are similar to flexi cap funds
- Example: Axis Long Term Equity Fund, Mirae Asset Tax Saver Fund
7. Sectoral/Thematic Funds
- Investment Focus: Specific sectors like pharma, IT, banking, or themes like ESG or infrastructure.
- Risk Level: Very high (lack of diversification).
- Suitability: Seasoned investors with strong sector knowledge.
- Historical Returns: Highly volatile depending on sector performance.
- Example: ICICI Prudential Technology Fund, Nippon India Pharma Fund
8. Contra Funds
- Investment Focus: Invests against market trends or sentiments.
- Risk Level: High
- Suitability: Long-term investors with high risk tolerance and belief in the value investing approach.
- Historical Returns: Potential for high returns due to high risk undertaken
- Example: SBI Contra Fund
Taxation of Equity Mutual Funds
- Short-Term Capital Gains (STCG): 20% if redeemed within 1 year.
- Long-Term Capital Gains (LTCG): 12.5% on gains exceeding ₹1.25 lakh in a financial year (if held for more than 1 year).
- ELSS Funds: Qualify for ₹1.5 lakh deduction under Section 80C.
Historical Performance Snapshot (Approximate CAGR – as of May 2025)- Category average
| Fund Type | 3-Year CAGR | 5-Year CAGR | 10-Year CAGR |
| Large Cap | 17.41% | 22.47% | 12.44% |
| Mid Cap | 25.35% | 31.17% | 16.13% |
| Small Cap | 24.54% | 36.24% | 17.39% |
| ELSS | 19.82% | 24.89% | 13.69% |
| Contra | 23.94% | 27.55% | 15.01% |
| Flexi cap | 19.64% | 24.04% | 13.50% |
| Multi cap | 22.48% | 28.10% | 15.25% |
(Source: Morning Star as of 2025)
Why Should You Invest in Equity Mutual Funds?
- Professional Management: Skilled fund managers handle your investments.
- Diversification: Exposure to a broad set of companies reduces risk.
- Ease of Access: SIPs start from ₹100; ideal for salaried individuals.
- Tax Efficiency: Especially with ELSS options under 80C.
- Long-Term Wealth Creation: Proven to outperform traditional instruments over long periods.
Final Thoughts
Equity mutual funds are an excellent tool for long-term wealth creation, but selecting the right type depends on your goals, risk appetite, and investment horizon. Whether you’re a conservative investor leaning towards large-cap funds or an aggressive one eyeing small-cap returns, there’s an equity mutual fund tailored for your needs.
Want to start investing or need help choosing the right fund? Get in touch with our experts today!