Equity Mutual Funds

• Summary
• Equity mutual funds invest mainly in company shares and can offer long-term capital growth, but their value is affected by market movements.
• They include large-cap, mid-cap, small-cap, multi-cap, ELSS, active, passive, sectoral and thematic funds, each with different investment approaches and risk levels.
• Investors can use strategies such as SIPs, lump-sum investing, index investing, value investing, and core-satellite allocation, while regularly reviewing portfolio overlap and category exposure.
• These funds carry STCG taxed at 20%, while LTCG above ₹1.25 lakh is taxed at 12.5%, subject to applicable tax rules.

What are Equity Mutual Funds?

Equity mutual funds are mutual fund schemes that invest primarily in equities and equity-related securities. Depending on the scheme category, the portfolio may invest across different companies, sectors and market-cap segments.

These funds primarily seek long-term capital growth. Since their value depends largely on stock-market movements, they can also experience significant short-term fluctuations.

How Equity Mutual Funds Work? 

Equity mutual funds collect money from investors and use it to buy shares and other equity-related securities according to the scheme’s investment objective. The value of these investments changes with market movements, which affects the fund’s Net Asset Value (NAV).

For example, suppose an equity mutual fund has ₹100 crore invested in shares and other assets, with ₹10 crore in liabilities and 5 crore units outstanding. Its NAV would be ₹18 per unit:

NAV = (₹100 crore − ₹10 crore) ÷ 5 crore units = ₹18

If the value of the fund’s investments rises while its liabilities and number of units remain unchanged, the NAV also rises. If the underlying investments fall in value, the NAV falls accordingly.

Investors receive units based on the applicable NAV when they invest. The value of their investment then changes as the NAV moves, subject to applicable charges and taxes.

Types of Equity Mutual Funds 

Let us now look at the different equity mutual fund types. They can be categorised based on the following measures: 

Investment Strategy-based Categorisation

1. Thematic or sectoral funds

Certain equity mutual funds aim to follow a fixed theme such as an emerging market theme. Additionally, certain funds might focus on investing in a particular sector of the market such as pharmaceuticals, IT, etc. However, it is important to note that these mutual funds have a larger risk associated with them because of their narrow focus. 

2. Focused equity fund

This fund aims to invest in a maximum of 30 stocks at the market capitalisation determined at the time of the launch of the scheme. 

3. Contra equity fund

These funds work based on a contrarian strategy where the fund managers identify underperforming stocks and purchase them with the aspiration of the prices increasing in the future. 

Market capitalisation-based Categorisation

1. Large-cap funds

These funds invest about 80% of their funds in the equity shares of large-cap companies. As a result, they come with lower risks compared with other funds. 

2. Mid-cap funds

These funds invest at least 65% of the total funds in mid-cap companies that occupy a position between 100 and 250 in the market. These are relatively more volatile but offer good returns. 

3. Small-cap funds

Small-cap funds invest at least 65% of their assets in small-cap companies, which are ranked 251st onwards by full market capitalisation.

4. Multi cap funds

These funds invest 65% of their funds in equity shares of large, mid and small-cap companies in varying ratios. The fund manager keeps rebalancing the portfolio according to the market performance to meet the required investment goals. 

Tax treatment-based categorisation

1. Equity linked savings scheme (ELSS)

ELSS funds invest at least 80% of their assets in equity and equity-related instruments and have a three-year lock-in period. Eligible ELSS investments can qualify for deduction within the overall ₹1.5 lakh limit under Section 123 read with Schedule XV of the Income Tax Act, 2025, where the investor opts for the old tax regime.

Investment style-based categorisation

1. Active funds

These funds are actively managed by the fund managers who determine the stocks they wish to invest in. 

2. Passive funds 

This fund works based on a particular scheme that determines all the stocks the fund should invest in. There is no active role of the fund manager in deciding the stocks for investment. 

Benefits & Risks of Investing in Equity Mutual Funds

Equity mutual funds offer benefits such as diversification, professional management and long-term growth potential, while key risks include:

Benefits

• Diversification: Equity mutual funds invest across multiple companies and sectors, which helps spread exposure instead of relying on the performance of a single stock.
• Professional management: Fund managers research securities, construct portfolios and make investment decisions according to the scheme’s stated objective.
• Long-term growth potential: Equity funds invest primarily in stocks and seek capital appreciation over the long term, although returns remain market-linked.
• Multiple investment choices: Investors can select from categories such as large-cap, mid-cap, small-cap, index, value, sectoral and thematic funds based on the scheme’s approach.

Risks

• Market volatility: Equity mutual fund values can rise or fall as stock prices change. For instance, in March 2026, the Sensex fell by more than 2,300 points in a single session, while the Nifty dropped below 23,750, showing how quickly market movements can affect equity investments.
• Liquidity risk: Some securities may be harder to sell during unfavourable market conditions, which can affect the fund’s ability to transact efficiently.
• Sector concentration: Funds focused on a particular sector can be more affected by developments within that industry. In February 2026, the Nifty IT index fell 5.5% in a single session, while mutual funds’ combined exposure to the top 10 IT stocks declined by more than ₹50,000 crore over the period reported, showcasing the impact of a sector-wide sell-off.
• Loss of principal: Since equity mutual funds are market-linked, the investment value can fall below the amount originally invested when the underlying securities decline. There is no guaranteed return on equity mutual fund investments.
• Managerial risk: In actively managed funds, investment decisions made by the fund manager can influence the scheme’s performance.

Taxation on Equity Mutual Funds

The tax on equity mutual funds depends mainly on the holding period and type of income. The current applicable provisions are as follows:

Tax aspect	Applicable treatment
Short-term capital gains (STCG)	Gains on units held for 12 months or less are taxed at 20%
Long-term capital gains (LTCG)	Gains on units held for more than 12 months are taxed at 12.5% on aggregate gains exceeding ₹1.25 lakh in a tax year
Indexation	No indexation benefit is available on LTCG from equity-oriented mutual funds.
ELSS tax benefit	ELSS has a 3-year lock-in. Investment of up to ₹1.5 lakh may qualify for deduction under Section 123 read with Schedule XV of the Income Tax Act, 2025 under the old tax regime, subject to the applicable tax regime and conditions.
IDCW /distributed income	IDCW received by an investor is taxable in the investor’s hands at the applicable income-tax rate. For non-resident investors, the applicable rate is generally 20%, subject to applicable provisions and tax treaty benefits.
Surcharge	Surcharge may apply depending on the investor’s total income. For individuals/HUFs and certain non-corporate investors, the maximum surcharge on specified equity capital gains is generally 15%, subject to the applicable provisions.
Health and education cess	A 4% cess is charged on the total income tax and applicable surcharge.

Key Strategies for Beginners & Active Investors 

The right strategy depends on your goals, investment period and comfort with market ups and downs. Common strategies include:

1. SIP investing: A fixed amount is invested at regular intervals instead of putting in a large amount at once. In fact, AMFI reported SIP contributions of ₹32,297 crore in August 2026, displaying the continued use of systematic investing among mutual fund investors.
2. Lump-sum investing: A larger amount is invested at one time, with the subsequent value depending on the fund’s performance and market movements.
3. Index investing: Passive equity funds track a specified market index rather than relying on a fund manager to select individual stocks.
4. Value investing: Value-oriented funds look for stocks that appear undervalued based on factors such as their market valuation, with the expectation that their value may improve over time. 
5. Sectoral or thematic investing: Investors can focus on a particular sector or theme through specialised equity funds. Since these funds have a narrower investment focus, their performance can be more closely linked to the selected sector or theme. 
6. Core-satellite strategy: A portfolio can combine a core allocation to diversified or index funds with smaller allocations to more specialised funds. This creates a distinction between the relatively broad core and the more focused satellite portion.

Portfolio Allocation & Risk Management 

Portfolio allocation determines how much of an investment portfolio is exposed to equity and other asset classes. Within equity mutual funds, the category choice also affects the type of market exposure.

Risk Management Factor	What It Means
Match risk capacity	Align equity exposure with your financial situation, investment horizon and ability to handle market fluctuations.
Avoid concentration	Spread investments across suitable categories rather than depending heavily on one sector, theme or market-cap segment.
Check portfolio overlap	Compare fund holdings to identify similar stocks across multiple schemes.
Monitor category exposure	Track exposure to large-cap, mid-cap, small-cap, sectoral and thematic funds.
Rebalance when needed	Assess portfolio weights periodically and adjust allocations if they move away from the intended mix.

Conclusion 

Equity mutual funds provide a convenient way to participate in the stock market through diversified portfolios. Still, the choice of fund should reflect the level of equity exposure and risk involved.

Before investing, compare the scheme’s portfolio, investment style, costs, tax treatment and overlap with existing holdings. This can help you determine whether the fund fits your intended portfolio allocation, rather than relying only on its past returns.

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