Types of Equity Funds: Understand Your Investment Options

Large cap, flexi cap, multi cap, focused: equity fund names can seem similar until you look at what each fund actually invests in.

Some funds concentrate on larger companies. Others include smaller businesses, follow a particular investing style or focus on a sector. Understanding the types of equity funds helps you compare these approaches and choose one that fits your goals, investment timeline and comfort with market fluctuations.

What are equity mutual funds?

Equity mutual funds pool money from investors and invest predominantly in shares and other equity-related instruments. When you invest, you receive units of the scheme rather than owning its individual shares directly.

The portfolio follows the scheme’s investment objective and category. Your investment value changes with its net asset value, or NAV, which reflects the value of its assets after accounting for liabilities and expenses. Returns are market-linked rather than fixed.

Sources: SEBI, Master Circular for Mutual Funds, 20 March 2026

How do equity funds generate returns?

The potential of equity funds to generate returns over time is linked to the performance of the securities held in the portfolio.

Equity funds may generate returns through two primary sources:

• Capital appreciation: If the market value of the shares the fund holds increases, the fund’s net asset value (NAV) may also rise. Investors may potentially earn gains if they redeem their units at a value higher than their purchase value.
• Income from investments: Companies in the portfolio may distribute profits to shareholders through dividends. Such income received by the fund forms part of the scheme’s overall portfolio returns. Where applicable, the scheme may make an IDCW (Income Distribution cum Capital Withdrawal) payout to investors.

An IDCW payout is not an additional return on top of the investment’s value. The NAV adjusts downwards to reflect the distribution, and payouts are not assured.

What are the different types of equity mutual funds?

Equity fund categories describe a scheme’s investment mandate, including its main investment focus and minimum allocation requirements. The comparisons below reflect SEBI’s current categorisation framework.

Equity funds based on market capitalisation

Market capitalisation is the total market value of a company’s outstanding shares.

For mutual fund classification, large cap companies occupy ranks 1–100 by full market capitalisation, mid cap companies occupy ranks 101–250, and small cap companies rank 251 onwards. Mutual funds use AMFI’s classification list, which is updated every six months, with additional updates for newly listed entities.

These are minimum requirements, rather than the fund’s actual allocation at a particular time.

Company size is one part of the comparison. The fund’s holdings, valuations and concentration also matter. Larger companies can experience substantial price changes, while smaller companies may involve greater fluctuations and liquidity challenges.

Source: SEBI, Master Circular for Mutual Funds, 20 March 2026, sections 3.8.1 and 3.9.

Multi cap versus flexi cap funds

Both categories can invest across large, mid and small cap companies. A multi cap fund must maintain a minimum allocation to each segment, while a flexi cap fund can change the mix within its overall mandate.

This means a flexi cap fund does not necessarily hold an even spread across company sizes. Check its latest portfolio to see where the money is invested.

Equity funds based on investment style and portfolio focus

These equity fund categories differ in how they select stocks and how concentrated their portfolios can be:

A focused fund’s limit concerns the number of stocks; it does not require the fund to invest in only one sector.

A dividend yield fund’s strategy also does not promise regular payouts to investors. Dividends received from portfolio companies and distributions under the scheme’s IDCW option are separate matters.

Source: SEBI, Master Circular for Mutual Funds, 20 March 2026, sections 3.8.1 and 3.9.

Sectoral and thematic equity funds

Sectoral funds invest at least 80% of total assets in equity and equity-related instruments of a particular sector, such as banking.

Thematic funds invest at least 80% in equity and equity-related instruments associated with a particular theme. A theme can connect companies across sectors, such as businesses linked to consumption or infrastructure.

These funds provide more concentrated exposure than a broadly diversified equity fund. Consider how much of your existing portfolio already depends on the same sector or theme.

Source: SEBI, Master Circular for Mutual Funds, 20 March 2026, section 3.8.1.

ELSS – Tax Saver Funds

Equity Linked Savings Schemes, or ELSS, invest at least 80% of total assets in equity and equity-related instruments and have a mandatory three-year lock-in. Each SIP instalment has its own three-year lock-in period.

Eligible investments may qualify for a deduction under the old tax regime, within the combined ₹1.5 lakh limit for qualifying payments and investments.

For tax years beginning on or after 1 April 2026, the relevant provision is Section 123 of the Income-tax Act, 2025, read with Schedule XV. This replaces the familiar Section 80C reference under the earlier Act. Eligibility and applicable conditions still need to be considered.

Sources: SEBI, Master Circular for Mutual Funds, sections 3.8.1 and 3.10.2; Income Tax Department, Section 123 and Schedule XV of the Income-tax Act, 2025.

Actively managed funds versus equity index funds

An actively managed fund’s investment team selects holdings within the scheme’s mandate.

An equity index fund aims to track a specified equity index. Its returns can differ from the index because of expenses, cash holdings and other tracking factors.

Index funds can follow broad market indices, particular company-size segments, sectors or other strategies. Check what the underlying index includes when comparing funds.

SEBI classifies index funds and ETFs under “Other Schemes”. Equity index funds are included here because they provide another route to equity investing.

Sources: SEBI, Master Circular for Mutual Funds, section 3.8.5

What changed in SEBI’s 2026 equity fund categorisation rules?

SEBI introduced a revised categorisation framework through its circular dated 26 February 2026. It was subsequently incorporated into the Master Circular for Mutual Funds dated 20 March 2026.

The changes relevant to equity fund comparisons include:

• Higher minimum equity allocations: Dividend yield, value, contra and focused funds must invest at least 80% of total assets in equity and equity-related instruments.
• Separate sectoral and thematic categories: The framework lists these as distinct equity fund categories.
• Value and contra funds from the same AMC: AMCs may offer both, subject to a maximum 50% portfolio overlap between the two schemes.
• Portfolio overlap limits for sectoral and thematic funds: Specified 50% limits apply when comparing these schemes with other equity schemes, with an exception for large cap schemes. Existing sectoral and thematic schemes have a three-year transition period to meet the overlap requirements.
• Monthly overlap disclosures: AMCs must publish category-wise portfolio overlap information on their websites.

These disclosures can help you check whether adding another fund would provide different exposure or largely repeat investments you already hold.

Sources: SEBI, Categorization and Rationalization of Mutual Fund Schemes, 26 February 2026; Master Circular for Mutual Funds, 20 March 2026, sections 3.8.1 and 3.8.10.

Features of equity mutual funds

Beyond their investment categories, equity mutual funds have several practical features:

• Professional management: The portfolio is managed by a fund management team in accordance with the scheme’s investment objective, strategy and applicable regulations.
• Diversification: Equity funds may invest across several companies and sectors, which may help spread company- or sector-specific risks.
• Liquidity: Open-ended equity mutual funds generally allow investors to purchase or redeem units on business days, subject to applicable scheme terms, lock-in periods and exit loads.

Diversification within an equity fund does not replace diversification across asset classes. Holding several equity funds can still leave a portfolio dependent on the same market.

How to choose an equity fund for your investment goals

Start with your goal and when you expect to need the money. Equity funds are generally considered for long-term investments, but the suitable horizon depends on the scheme and your circumstances.

Then review the fund’s mandate, latest portfolio, Riskometer and costs. These checks help you avoid common selection mistakes:

• Choosing based on past returns alone: A scheme that generated higher returns during a particular period may not deliver similar returns in the future.
• Ignoring the investment objective: Investors may select a scheme without checking whether its investment strategy and portfolio align with their financial goals and investment horizon.
• Overlooking risk: Investors may need to assess the Riskometer, portfolio composition and their own risk appetite before investing.
• Focusing only on expense ratio: A lower expense ratio does not by itself indicate that a scheme may be suitable.
• Ignoring portfolio overlap: Holding multiple equity funds with similar portfolios may provide limited additional diversification. Investors may examine portfolio holdings before adding another scheme.

Compare historical performance with the relevant benchmark and similar schemes over comparable periods. For an index fund, also review tracking difference and tracking error.

Sources: SEBI Investor, Factors to Consider Before Investing

Past performance may or may not be sustained in future.

How are equity mutual funds taxed in India?

Equity-oriented mutual funds are generally taxed based on the holding period and the capital gains realised when units are redeemed or transferred.

The capital-gains rates apply to qualifying equity-oriented funds, subject to the applicable securities transaction tax conditions. Surcharge and cess may also apply.

The ₹1.25 lakh threshold applies to aggregate qualifying long-term gains across the relevant assets, rather than separately to each fund. For SIP investments, the holding period is calculated separately for each instalment.

An overseas equity fund does not automatically qualify for the same tax treatment as a domestic equity-oriented fund. Check the scheme’s tax classification.

Sources: Income Tax Department, Income-tax Act, 2025, as amended by the Finance Act, 2026; Section 196, covering qualifying short-term capital gains; Section 198, covering qualifying long-term capital gains and the definition of an equity-oriented fund.

The tax information in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.

Direct vs regular plans and why expense ratios matter

Mutual funds generally offer direct and regular plans under the same scheme. The key difference is how the investor accesses the scheme and how distribution-related expenses are accounted for.

• Direct plans: Investors purchase units directly from the mutual fund without going through a distributor. As there is no distributor commission included in the expense structure, the expense ratio of a direct plan is generally lower than that of the corresponding regular plan.
• Regular plans: Investors invest through an AMFI-registered distributor or other permitted intermediary. The AMC pays distributor-related commissions from the scheme’s expenses, which forms part of the regular plan’s expense structure.

The two plans follow the same underlying portfolio and investment objective, but their expenses and NAVs differ. Compare corresponding plans and options when reviewing returns.

An exit load is separate from ongoing expenses. Check whether one applies to a redemption and how long the relevant holding period lasts.

How to invest in equity mutual funds

Once you have selected a suitable scheme, complete or validate your Know Your Customer (KYC) requirements and choose the plan and investment option.

You can invest through:

• An SIP: Contribute a specified amount at regular intervals.
• A one-time investment: Invest an available amount in a single transaction.
• A combination: Make an initial investment and continue contributing regularly.

An SIP is a method of investing. The underlying fund determines the portfolio exposure and investment risk.

Before confirming a transaction, check the scheme, plan, option, amount and applicable terms.

Explore equity funds from Bajaj AMC

If you’re comparing funds that invest across company sizes, look at Bajaj Finserv Flexi Cap Fund and Bajaj Finserv Multi Cap Fund. Both invest in large, mid and small cap companies, but their approaches differ.

The Flexi Cap Fund can adjust the mix across these segments and uses megatrend investing to identify businesses linked to long-term changes in the economy and society. The Multi Cap Fund maintains the category’s minimum allocation to each segment and follows a contrarian approach, looking for opportunities that may be out of favour with the market.

For exposure primarily to larger companies, you can compare Bajaj Finserv Large Cap Fund with Bajaj Finserv Nifty 50 Index Fund. The Large Cap Fund actively selects investments and uses a high active share approach, meaning its portfolio differs meaningfully from its benchmark. The Nifty 50 Index Fund follows the Nifty 50 Total Return Index, with returns subject to expenses and tracking error.

These comparisons help you make two decisions: which part of the equity market you want exposure to, and whether you prefer active stock selection or index tracking.

Explore each scheme’s portfolio, Riskometer, expenses and exit load before choosing. Bajaj AMC’s investor portal offers SIP and one-time investment options, subject to scheme terms and KYC requirements.

Sources: Bajaj AMC’s official scheme pages for Flexi Cap Fund, Multi Cap Fund, Large Cap Fund and Nifty 50 Index Fund.

Conclusion

Understanding the types of equity funds helps you compare what each scheme invests in and how it fits your goals. Review equity fund categories alongside the actual portfolio, investment horizon, costs and tax treatment. You do not need every category in your portfolio; choose an approach that complements your existing investments and suits your plan.

FAQs

What are the main types of equity mutual funds in India?

SEBI’s equity categories include large cap, mid cap, small cap, large & mid cap, multi cap, flexi cap, dividend yield, value, contra, focused, sectoral, thematic and ELSS – Tax Saver Funds. Equity index funds provide another route to equity investing and are classified under “Other Schemes”.

Which equity fund may suit a beginner?

A beginner can compare broadly diversified approaches, such as large cap, flexi cap or broad market equity index funds. Suitability depends on the goal, investment horizon and ability to accept market fluctuations.

What is the difference between large cap and multi cap equity funds?

Large cap funds concentrate mainly on large cap companies. Multi cap funds must maintain minimum exposure to large, mid and small cap companies, giving them a different company-size mix.

Is ELSS a type of equity fund?

Yes. ELSS – Tax Saver Funds invest predominantly in equity and equity-related instruments. They have a three-year lock-in and may qualify for a deduction under the old tax regime, subject to applicable conditions.

Can I invest in equity mutual funds with a low-risk appetite?

Equity mutual funds primarily invest in equities and may experience market-linked volatility. They may therefore not be suitable for investors with a low risk appetite.

What is the investment horizon of an equity mutual fund?

Equity mutual funds are generally intended for a long-term investment horizon because equity markets may experience short-term volatility. There are many types of equity mutual funds, and the investment horizon varies for each.

Is an equity fund different from a mutual fund?

An equity fund is a type of mutual fund. Mutual funds also include debt, hybrid and other schemes with different investment mandates.

Do I need a demat account to invest in an equity mutual fund?

A demat account is generally not required for conventional equity mutual fund investments, including SIPs. Units can be held in a mutual fund folio. Buying and selling ETF units through a stock exchange generally requires demat and trading accounts.