27th May 2025, Gaurav Kumar Singh
Investing in mutual funds can seem like a maze of jargon and choices, especially for first-time investors. One of the most crucial yet often confusing aspects is understanding the categories of equity mutual funds. With dozens of schemes and terms like “multi-cap”, “ELSS”, and “contra fund” floating around, how does one know where to begin?
In this blog, let’s break down the categorisation of equity mutual funds in simple, easy-to-understand language. This guide will help you understand different fund types, how they invest, and which ones might be suitable for your financial goals.
What Are Equity Mutual Funds?
Equity mutual funds primarily invest in stocks (equities) and are the most popular category of mutual funds in India. According to SEBI regulations, at least 65% of the total assets of these funds must be invested in equity and equity-related instruments.
These funds are designed for investors who:
a) Have a higher risk appetite
b) Seek long-term capital appreciation
c) Prefer market-linked returns over fixed income
Equity funds come in various types based on the market capitalisation of companies and investment strategies. Let’s explore these categories.
Types of Equity Mutual Funds
1. Multi Cap Fund
Investment Style: Diversified across large, mid, and small-cap stocks.
Allocation: At least 25% in each category (large, mid, small).
Suitability: Ideal for those looking for balanced exposure to all segments of the market.
2. Flexi Cap Fund
Investment Style: Flexible allocation across large, mid, and small-cap stocks.
Allocation: At least 65% in equity and equity-related instruments.
Suitability: Best for investors seeking fund manager expertise in dynamic market conditions.
3. Large Cap Fund
Investment Style: Predominantly invests in the top 100 companies by market capitalisation.
Suitability: Suitable for conservative investors looking for stable returns from established companies.
4. Large and Mid Cap Fund
Investment Style: Invests in the top 250 companies, with a minimum of 35% each in large and mid-cap stocks.
Suitability: Balanced approach for growth and stability.
5. Mid Cap Fund
Investment Style: Focused on mid-sized companies, ranking from 101 to 250 in market capitalisation.
Suitability: For investors willing to take moderate risks for higher returns.
6. Small Cap Fund
Investment Style: Focused on small-sized companies beyond the top 250.
Suitability: High-risk, high-reward profile; suitable for aggressive investors.
7. Dividend Yield Fund
Investment Style: Invests in stocks that pay high dividends.
Suitability: Great for investors looking for income and moderate capital growth.
8. Value Fund
Investment Style: Invests in undervalued stocks that are expected to perform better as their value gets unlocked.
Suitability: For patient investors with a long-term horizon.
9. Contra Fund
Investment Style: Contrarian approach—invests in underperforming sectors or stocks with potential for future growth.
Suitability: For bold investors who believe in “buying low and waiting long”.
10. Focused Fund
Investment Style: Invests in a limited number of stocks (maximum 30), across market caps.
Suitability: High-conviction investing, best suited for experienced investors.
11. Sectoral/Thematic Fund
Investment Style: Invests in a particular sector or theme, e.g., banking, pharma, IT, ESG.
Suitability: High risk due to concentrated exposure; best for tactical or knowledgeable investors.
12. Equity Linked Savings Scheme (ELSS)
Investment Style: Equity-oriented fund with tax-saving benefits.
Lock-in Period: 3 years.
Tax Benefit: Under Section 80C (up to ₹1.5 lakh).
Suitability: For salaried individuals and tax-conscious investors.
How to Choose the Right Equity Fund?
When choosing among equity mutual funds, consider these factors:
Risk Appetite – Are you comfortable with high market fluctuations?
Investment Horizon – Can you stay invested for 3–5 years or more?
Financial Goals – Are you aiming for wealth creation, retirement, or tax saving?
Fund Manager Experience – Particularly important in Flexi-cap, Focused, and Contra funds.
Final Thoughts
Equity mutual funds are a powerful tool to build wealth over the long term. However, each fund category comes with its own risk-reward dynamics. Understanding the categorisation helps investors match the right fund with their personal financial goals and comfort with risk.
By making informed choices, you can build a well-diversified portfolio that balances growth, income, and stability.
Remember: Always read the scheme-related documents carefully and consult a financial advisor if you’re unsure.
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