{"id":55260,"date":"2026-10-13T19:49:22","date_gmt":"2026-10-13T14:19:22","guid":{"rendered":"https:\/\/www.tatacapital.com\/blog\/?p=55260"},"modified":"2026-10-13T19:49:24","modified_gmt":"2026-10-13T14:19:24","slug":"equity-mutual-funds","status":"publish","type":"post","link":"https:\/\/www.tatacapital.com\/blog\/wealth-services\/equity-mutual-funds\/","title":{"rendered":"What is an Equity Mutual Fund? Types and How It Works"},"content":{"rendered":"\n

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Summary<\/strong>: An equity mutual fund pools money from many investors and puts most of it into company shares, aiming for long-term growth as those businesses grow. This blog covers what that actually means, how the fund works day to day, and the SEBI-defined categories you will come across. By the end of the guide, you will know how these funds are taxed and get a practical path to investing in one.<\/p>\n\n\n\n

An equity fund is a fund that invests mainly, at least 65% of its assets in the shares of companies aiming for long-term capital growth by giving you a stake in the stock market through a diversified and professionally managed portfolio. This page covers what that means in practice, how the fund actually works, the categories SEBI has defined for equity mutual funds in India, how these funds are taxed and how to go about investing in one.<\/p>\n\n\n\n

Bear in mind that equity funds offer higher return potential than most other fund types, but that comes with higher risk and genuine short-term volatility. This is a major reason why it suits investors with a long horizon rather than short-term goals.<\/p>\n\n\n\n

Equity Mutual Fund Meaning<\/strong><\/h2>\n\n\n\n

An equity mutual fund pools money from many investors and invests at least 65% of it in stocks of companies aiming for long-term capital appreciation. Returns depend on how the underlying shares perform and hence, they are market-linked and not guaranteed.<\/p>\n\n\n\n

Also Read – Types of mutual funds in India<\/a><\/p>\n\n\n\n

How Do Equity Mutual Funds Work?<\/strong><\/h2>\n\n\n\n

When you invest, your money joins a pool collected from many other investors and a professional fund manager invests that pool across a diversified basket of stocks, following the specific mandate of the scheme you chose.<\/p>\n\n\n\n

In return, you hold units in the fund, and the value of each unit, its NAV,  rises and falls with the value of the underlying portfolio. Your returns come from two sources here: capital appreciation as the stocks gain value and any dividends the fund receives from the companies it holds.<\/p>\n\n\n\n

Pooling money this way gives you two things that would be difficult to arrange on your own, i.e., broad diversification across many stocks and access to professional research and portfolio management. You can enter either through a lump sum or through a SIP. Moreover, because the portfolio is stock-based, its value moves daily and can fall along with the market.<\/p>\n\n\n\n

Read More – PMS vs Mutual Fund<\/a><\/p>\n\n\n\n

Types of Equity Mutual Funds (SEBI Categories)<\/strong><\/h2>\n\n\n\n

SEBI groups equity funds into distinct categories based on what they are allowed to hold, which further makes comparing them far more meaningful than looking at fund names alone:<\/p>\n\n\n\n

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Category<\/strong><\/td>What It Invests In<\/strong><\/td>Risk<\/strong><\/td>Suggested Horizon<\/strong><\/td><\/tr>
Large-Cap<\/td>At least 80% in the top 100 companies by market size<\/td>Relatively steadier<\/td>5+ years<\/td><\/tr>
Mid-Cap<\/td>At least 65% in companies ranked 101st-250th<\/td>Higher growth, higher risk<\/td>5-7+ years<\/td><\/tr>
Small-Cap<\/td>At least 65% in companies ranked 251st onward<\/td>Highest risk and growth potential<\/td>7+ years<\/td><\/tr>
Large & Mid-Cap<\/td>At least 35% each in large-cap and mid-cap stocks<\/td>Moderate to high<\/td>5-7+ years<\/td><\/tr>
Multi-Cap<\/td>At least 25% each in large, mid, and small-cap stocks<\/td>Moderate to high<\/td>5-7+ years<\/td><\/tr>
Flexi-Cap<\/td>At least 65% in equity, mix decided entirely by the manager<\/td>Varies with the manager’s calls<\/td>5+ years<\/td><\/tr>
Focused<\/td>Concentrated in a maximum of 30 stocks<\/td>Higher, due to concentration<\/td>5+ years<\/td><\/tr>
Value \/ Contra<\/td>Undervalued or contrarian stock picks<\/td>Moderate to high<\/td>5+ years<\/td><\/tr>
Dividend Yield<\/td>Stocks with a track record of paying dividends<\/td>Moderate<\/td>5+ years<\/td><\/tr>
Sectoral \/ Thematic<\/td>One sector or theme, such as banking or infrastructure<\/td>High, concentrated<\/td>5+ years, higher conviction needed<\/td><\/tr>
ELSS<\/a><\/td>Diversified equity with a tax-saving mandate<\/td>High<\/td>3-year lock-in, ideally longer<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Here, two categories are worth a quick clarification since they are often confused. A flexi-cap fund leaves the large, mid and small-cap mix entirely to the manager’s discretion, while a multi-cap fund is required to hold a minimum in each of the three segments. Hence, the two can look similar on paper but behave quite differently depending on where the manager leans.<\/p>\n\n\n\n

It is also worth knowing that index funds sit alongside this list as the passive equity option, thereby tracking a market index rather than having a manager pick stocks.<\/p>\n\n\n\n

Also Read – Equity-debt Allocation<\/a><\/p>\n\n\n\n

What Changed in 2026: SEBI’s Updated Framework<\/strong><\/h2>\n\n\n\n

SEBI issued a revised mutual fund categorisation circular on 26 February 2026, effective 1 April 2026, that changed a few of the categories above. The minimum equity allocation for Focused, Contra, Value, and Dividend Yield funds was raised from 65% to 80%, keeping these categories more strictly “true to label.”<\/p>\n\n\n\n

Portfolio overlap between similar schemes, such as a Value fund and a Contra fund from the same fund house, or between sectoral and thematic schemes is now capped at 50%, with a multi-year compliance window for existing funds to adjust. As part of this update, fund houses are now permitted to offer both a Value fund and a Contra fund side by side, provided they stay within that overlap limit. This was something that was not allowed under the earlier framework.<\/p>\n\n\n\n

Also Read – Mutual Fund Portfolio Analysis<\/a><\/p>\n\n\n\n

Disclaimer<\/em><\/strong>: Regulations get revised over time, so it is worth checking a fund’s latest Scheme Information Document for its current mandate before you rely on category labels alone.<\/em><\/p>\n\n\n\n

Benefits of Equity Mutual Funds<\/strong><\/h2>\n\n\n\n

Equity funds offer a genuine set of advantages, provided you keep the long-term framing in mind (typically 5 years or more) rather than expecting a one-way path upward:<\/p>\n\n\n\n