What are Equity Mutual Funds?
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This article is for general information/education and is not investment advice. The information is shared in good faith and for general informational purposes only. Ujjivan SFB does not make any representations or warranties regarding the accuracy, completeness, or reliability of the content.
Mutual Fund Distributor: Ujjivan Small Finance Bank Ltd
ARN: 175676
March 10, 2026
Equity mutual funds are among one of the most commonly discussed investment options in the market, especially for individuals exploring long-term wealth creation. These funds invest primarily in the shares of listed companies, allowing investors to participate in the growth potential of businesses across sectors and industries.
Instead of selecting and managing stocks individually, investors pool their money into a professionally managed portfolio that follows a defined investment strategy. Because these investments are linked to stock market performance, their value can fluctuate over time. Understanding how equity mutual funds are structured and how they operate can help investors better interpret their role within a broader investment plan.
What Are Equity Mutual Funds and How Do They Work?
A mutual fund qualifies as an equity mutual fund if a minimum of 65% of its assets are invested in equities and equity-related instruments.
Investors do not deal with company shares directly. Their exposure to equity comes through the fund, and any gains or losses are reflected in the value of their units.
What Are The Types of Equity Mutual Funds?
Equity mutual funds follow different investment rules. Some fund houses (AMC) may focus on company size, others on sectors or investment style.
| Equity Fund Category | What the Fund Invests In |
| Large-cap Funds | Shares of large, established companies (at least 80% in large-cap stocks) |
| Mid-cap Funds | Shares of medium-sized companies (at least 65% in mid-cap stocks) |
| Small-cap Funds | Shares of smaller companies (at least 65% in small-cap stocks) |
| Large & Mid-cap Funds | Mix of large and mid-sized companies (at least 35% each in large and mid-caps) |
| Multi-cap Funds | Shares across large, mid, and small companies (at least 75% in equities overall) |
| Flexi-cap Funds | Equity investments across market sizes (at least 65% in equities) |
| Focused Funds | Limited number of selected stocks (up to 30 stocks, at least 65% in equities) |
| Sectoral Funds | Shares from a specific sector (at least 80% in one sector) |
| Thematic Funds | Shares linked to a common theme (at least 80% aligned to a theme) |
| Value Funds | Stocks selected based on value-oriented strategy (at least 65% in equities) |
| Growth Funds | Stocks selected based on growth-oriented strategy (at least 65% in equities) |
| Contra Funds | Stocks selected using a contrarian strategy (at least 65% in equities) |
| Index Funds | Stocks that make up a market index |
| ELSS | Equity funds with tax benefit (at least 80% in equities; 3-year lock-in) |
Note: The categories and percentage limits are based on current classification guidelines issued by SEBI/AMFI. These may change over time. Please confirm the latest details on the official websites.
What Kind of Risk Do Equity Mutual Funds Carry?
Equity mutual funds are linked to the stock market. Since share prices move up and down, the value of these funds also changes over time. This movement is commonly referred to as market volatility.
Risk in equity mutual funds does not come from one source. It depends on factors such as
How Are Equity Mutual Funds Taxed?
Taxation of equity mutual funds depends on the holding period at the time of redemption. Gains are classified as short-term or long-term based on how long the investment is held.
Taxation is applied only when units are redeemed. Changes in the fund’s value while the investment is held do not attract tax.
| Holding Period | Type of Gain | Current Tax Treatment |
| Up to 12 months | Short-Term Capital Gain (STCG) | Taxed at 20% flat under Section 111A (if STT is paid) |
| More than 12 months | Long-Term Capital Gain (LTCG) | 12.5% on gains above ₹1.25 lakh per financial year (no indexation benefit) |
Disclaimer: Data as on 10 March 2026. The information presented here is for general informational purposes only and should not be considered legal or tax-advice.
Are There Any Tax Deductions or Adjustments in Equity Mutual Funds?
In most cases, equity mutual funds do not offer tax deductions on the amount invested. Tax is generally applied only when units are redeemed, based on the applicable capital gains rules.
There are, however, specific situations where tax provisions apply differently.
1. Tax Deductions Through ELSS
Equity Linked Savings Scheme (ELSS) is a category of equity mutual funds that is eligible for tax deduction up to ₹1.5 lakh in a financial year under Section 80C of the Income-tax Act.
ELSS funds come with a mandatory lock-in period of three years, during which units cannot be redeemed. Apart from this deduction-related feature, taxation rules for ELSS are the same as other equity mutual funds.
2. Set-off of Losses in Equity Mutual Funds
Losses from equity mutual fund investments may be adjusted against capital gains, as permitted under tax laws.
If capital losses cannot be fully adjusted in the same financial year, they may be carried forward for future years( currently up to 8 years), subject to conditions.(source)
What Are the Ways to Invest in Equity Mutual Funds and the Costs Involved?
Equity mutual funds can be invested in through different modes(SIP vs Lump sum), but modes don’t change how the fund works; they only change how and when money is invested.
- Lump sum investment: A single amount is invested at one time. The investment value then moves with the market from that point onward.
- Systematic Investment Plan (SIP): A fixed amount is invested at regular intervals, such as monthly. Each investment buys units at the prevailing NAV on that date.
Who May Consider Equity Mutual Funds?
Equity mutual funds may be considered by investors with a longer time horizon and comfort with market ups and downs. They are often explored by investors who:
What Should You Know
Final Thoughts
Equity mutual funds invest in company shares and move in line with market conditions. Their value changes over time based on market movement, costs, and how the fund follows its stated objective. The equity mutual funds returns are not guaranteed and can vary across periods. What matters is clarity on how the fund works, what risks are involved, and how disclosures are shared. Keeping expectations aligned with the market-linked nature of these funds is essential.
