What are the different types of equity mutual funds?

Summary: Not all equity funds are alike. From steady large-cap funds to high-growth small-cap funds and tax-saving ELSS, choosing wisely can shape your wealth journey. This guide breaks down each type—what they invest in, who they suit and how they fit into a portfolio.

Equity mutual funds are one of the most popular ways to build long-term wealth. They invest primarily in shares of listed companies and give you a chance to participate in the growth of businesses and, by extension, the economy. But not all equity funds are the same.

Different types of equity funds cater to different goals and risk appetites. If you’ve ever wondered whether you should pick large-cap, mid-cap, small-cap, flexi-cap or tax-saving funds, this guide is for you.

At Value Research, we’ve spent decades analysing funds to help investors like you make informed choices. Let’s break down the various types of equity funds in India in simple terms.

1. Based on company size (market capitalisation)

Equity funds are often categorised by the size of companies they invest in — large, mid or small caps. Here’s what that means:

Large-cap funds

Large-cap funds invest at least 80 per cent of their money in the top 100 companies by market capitalisation—names you know well, like Reliance Industries, TCS or HDFC Bank . These are stable, industry-leading companies with proven track records.

• Who is it for? If you prefer steady, relatively lower-risk growth.
• Risk level: Lower than mid- and small-cap funds.
• Ideal horizon: 5+ years.

Over the last 10 years, some large-cap funds have delivered SIP returns of about 15-17 per cent, making them a reliable foundation for long-term portfolios.

Mid-cap funds

Mid-cap funds invest at least 65 per cent of their money in companies ranked 101–250 by market value. These businesses are often in their growth phase, with potential to scale rapidly.

• Who is it for? If you can handle some volatility for higher growth potential.
• Risk level: Moderate to high.
• Ideal horizon: 7+ years.

Some mid-cap funds have historically delivered 21-23 per cent SIP returns over 10 years but come with sharper ups and downs.

Small-cap funds

Small-cap funds invest at least 65 per cent of their money in companies ranked 251 and below, in terms of market value. Small-cap businesses can deliver outsized growth but are far more volatile.

• Who is it for? If you’re an aggressive investor willing to ride out big market swings.
• Risk level: High.
• Ideal horizon: 7+ years.

In the past 10 years, some small-cap funds have delivered SIP returns of 21-24 per cent, rewarding those who stayed invested through rough patches.

2. Diversified equity funds

Some funds spread across company sizes:

Multi-cap funds

SEBI mandates that multi-cap funds allocate at least 25 per cent each to large-, mid- and small-cap stocks, ensuring at least 75 per cent of the portfolio is invested in equities and equity-related instruments. The remaining 25 per cent is left to the fund manager’s discretion. This structure provides broad exposure across the entire market spectrum.

• Who is it for? Those who want predefined diversification across all caps.
• Risk level: Moderate.
• Ideal horizon: 5+ years.

Over the last three years, some multi-cap funds have delivered around 20-23 per cent SIP returns.

Flexi-cap funds

Flexi-cap funds also invest across large-, mid- and small-cap stocks. However, unlike multi-cap funds, they are not bound by the rule of allocating 25 per cent to each segment. This makes them truly flexible—they can invest across any market cap as per the fund manager’s view. As per SEBI’s definition, flexi-cap funds must invest at least 65 per cent in equity and equity-related instruments.

• Who is it for? Investors wanting flexibility and an all-weather equity option.
• Risk level: Moderate.
• Ideal horizon: 5+ years.

Over the last 10 years, some flexi-cap funds have delivered around 18-20 per cent SIP returns, making them a strong core portfolio choice for long-term investors.

3. Based on purpose

ELSS (Equity Linked Savings Scheme)

ELSS funds are similar to flexi-cap funds in the sense that they can invest across large-, mid- and small-cap stocks. However, what sets them apart is their tax-saving benefit under Section 80C (old tax regime) and their mandatory three-year lock-in period, the shortest among tax-saving instruments.

• Who is it for? Those who want to grow wealth while saving tax under the old tax regime.
• Risk level: Moderate to high.
• Ideal horizon: 5+ years (even though the lock-in is three years).

Over the last 10 years, some ELSS schemes have delivered around 18-22 per cent SIP returns, with the dual advantage of tax benefits and long-term equity growth.

4. Based on investment style

Value/Contra funds

These invest at least 65 per cent in fundamentally strong but undervalued stocks — companies that are temporarily out of favour. They may underperform in the short term but tend to reward patience when the market realises their value.

• Who is it for? Investors comfortable with contrarian bets—i.e., buying fundamentally strong but out-of-favour stocks and patiently waiting for their value to be recognised.
• Risk level: Moderate.
• Ideal horizon: 5+ years.

Focused funds

Focused funds must invest at least 65 per cent of their assets in equities and equity-related instruments but are restricted to holding a maximum of 30 stocks. This concentrated approach allows them to take high-conviction bets in fewer companies, aiming for potentially higher returns.

• Who is it for? Investors comfortable with concentrated risk.
• Risk level: High.
• Ideal horizon: 5+ years.

Sector or thematic funds

These funds invest at least 80 per cent in a specific sector (like IT, banking or pharma) or themes (like ESG or consumption). They can deliver big gains when that sector does well but also fall sharply when it doesn’t.

• Who is it for? Only for those who understand the sector/theme and can tolerate high risk.
• Risk level: Very high.
• Ideal horizon: 5+ years or aligned with sector cycles.
• Value Research’s view: These are too risky for most investors; we don’t recommend them.

Comparison of equity fund types in India

Final word

Each type of equity fund serves a different purpose. Large-cap funds and diversified funds like flexi-cap and multi-cap funds can be your portfolio’s core for stability, while mid- and small-cap funds add growth potential. ELSS funds help with tax planning (under the old tax regime).

At Value Research, we recommend building your core portfolio around diversified equity mutual funds and allocating only a small proportion to riskier categories, such as small-cap funds, for their growth potential.

Want to start a Rs 5,000 SIP but unsure which type of equity fund to pick?
At Value Research Fund Advisor, we simplify this decision. With clear, goal-based mutual fund recommendations across large-cap, flexi-cap, mid-cap and more, we help you invest smartly and build long-term wealth with confidence.

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Also read:
What are aggressive hybrid funds?
What are balanced advantage funds?

This article was originally published on July 30, 2025.