1. What are Equity Mutual Funds?
Equity Mutual Funds pool money from many investors and invest primarily in the shares of companies.
Their goal is to grow capital over time by participating in the stock market.
They suit investors looking for long-term growth and who can tolerate short-term volatility.
2. How Equity Mutual Funds Work
A fund manager (or a team) selects stocks and manages the portfolio according to the fund’s stated objective.
Investors own units of the fund; the fund’s Net Asset Value (NAV) rises or falls as portfolio stock prices change. Returns come from capital gains, dividends, or both
3. SEBI (2017) Classification
SEBI’s 2017 classification standardized mutual fund categories to improve comparability and reduce confusion. Key outcomes:
- Clearer, well-defined categories (large‑cap, mid‑cap, small‑cap, multi‑cap, flexi‑cap, focused, sectoral/thematic, ELSS, dividend yield, value/contra).
- Standard minimum asset allocation rules by market cap for many categories.
- Reduced duplication — more meaningful comparisons for investors.
Note: This classification remains the backbone for categorizing equity schemes in India.
4. Types of Equity Mutual Funds (Post-SEBI)
| Category | Simple Description |
| Large Cap Fund | At least 80% in top 100 companies [ interms of market capitalisation ] Relatively stable, lower volatility among equity funds. |
| Mid Cap Fund | At least 65% in companies ranked 101–250. Higher growth potential with moderate risk. |
| Small Cap Fund | At least 65% in companies ranked 251+. High growth potential, higher volatility. |
| Multi Cap Fund | Minimum 25% each in large, mid, small cap — balanced across market caps. |
| Flexi Cap Fund | Minimum 65% in equities; manager free to allocate across caps. Flexible approach. |
| Focused Fund | Max 30 stocks — concentrated, high-conviction bets across caps. |
| Sectoral / Thematic Fund | Min 80% in a sector/theme (e.g., technology, pharma, ESG) — targeted and risky. |
| ELSS | Min 80% in equities; 3-year lock-in; eligible for Section 80C tax benefit. |
| Dividend Yield Fund | Min 65% in dividend-paying companies — income-oriented equity exposure. |
| Value / Contra Fund | Min 65% following value or contrarian strategies — looks for undervalued stocks. |
5. Active vs Passive Funds
Active funds aim to beat a benchmark by stock selection; passive funds replicate an index. Active funds charge higher fees and may outperform or underperform; passive funds are low-cost and deliver index returns.
| Feature | Active Funds | Passive Funds |
| Management | Active stock selection | Tracks an index (replication) |
| Objective | Outperform benchmark | Match benchmark |
| Cost | Higher (research & management) | Lower |
| Examples | Large/Mid/Small cap active funds | Index funds, ETFs |
6. How to Invest in Equity Mutual Funds
Investing choices are twofold: how you invest (SIP vs Lump Sum) and the channel (Direct, Regular, Online).
1) Based on Method
| Method | What it means | Suitable for |
| SIP (Systematic Investment Plan) | Regular fixed investments (e.g., monthly) | Disciplined investors, beginners |
| Lump Sum | One-time investment | Investors with surplus funds or tactical view |
2) Based on Channel
| Channel | What it means | Suitable for |
| Direct Plan (AMC) | Invest directly with the fund house — lower expense ratio | DIY investors confident in selection |
| Regular Plan (Distributor/Advisor) | Through advisor/distributor who may charge commission | Investors seeking advice or hand-holding |
| Online Platforms / Apps | Easy comparison and execution | Tech-savvy investors |
7. How to Evaluate Fund Performance — Top 7 Parameters
The following parameters give a clear, practical view of fund quality and suitability.
| Parameter | What it tells you |
| Fund Returns (1/3/5-year) | Historical growth — compare against peers and benchmark. |
| Benchmark Comparison | Shows if fund beats or lags its stated benchmark. |
| Sharpe Ratio (Risk-adjusted return) | Higher = better returns for risk taken. |
| Alpha | Manager’s value-add over benchmark (positive is good). |
| Standard Deviation | Volatility measure — lower = steadier returns. |
| Expense Ratio | Annual fees — lower expense helps net returns. |
| Consistency of Performance | Regular outperformance across cycles — shows reliability. |
Additions to check: Fund manager tenure, AUM size, portfolio overlap, turnover ratio, exit load and style consistency.
8. Choosing Funds & Building an Equity Portfolio
Successful portfolio building hinges on time horizon and volatility tolerance. Below are sample templates you can adapt:
| Investor Type | Time Horizon | Risk Tolerance | Sample Fund Mix |
| Conservative Beginner | 5+ years | Low–Moderate | 70% Large Cap + 30% Flexi/Multi Cap |
| Balanced Growth | 5–7 years | Moderate | 50% Large Cap + 30% Mid Cap + 20% Flexi Cap |
| Aggressive Long-Term | 7–10+ years | High | 40% Large Cap + 40% Mid Cap + 20% Small Cap |
| Tax-Saver | 3+ years (lock-in) | Moderate | 100% ELSS |
| Thematic / Opportunistic | 5–8 years | High | Core (Large/Mid) 70% + Thematic/Sectoral 30% |
9. Core & Satellite Strategy
The Core & Satellite approach balances stability (core) with growth/opportunity (satellite).
Typical split (example): 70% Core / 30% Satellite — adjust toward core as you age or near goals.
Core: Low-cost, diversified funds — index funds, large-cap or flexi/multi-cap funds. Purpose: stability and steady returns.
Satellite: Mid/small-cap funds, sectoral/thematic, international funds or active alpha-seeking funds. Purpose: capture extra growth.
Rebalancing rule: Review annually (or when allocation drifts by ±5%) and move profits from satellite to core to restore original split.
Watchouts: avoid overtrading; ensure satellite remains a controlled, limited portion of the portfolio.
10. Fees, Costs & Their Impact
Costs reduce your net returns. Key fees:
- Expense Ratio / TER: Annual management cost. Lower is better for long-term compounding.
- Exit Load: Charges on early redemptions — affects short-term returns.
- Transaction Costs & Taxes: Capital gains taxes apply on profits; frequent turnover increases tax drag.
Quick example: A 1% higher expense ratio over 10 years can significantly lower your corpus — always factor expense into fund comparisons.
11. Taxation of Equity Mutual Funds
Effective note: Tax rules below apply to transfers on or after 23 July 2024. Keep the article’s Last updated date in mind as tax rules can change.
| Holding Period | Tax Rule (Equity Mutual Funds) | Note |
| ≤ 12 months (STCG) | 20% on gains | Short-term capital gains taxed at 20% (applicable from 23 Jul 2024 for transfers on/after date). |
| > 12 months (LTCG) | 12.5% on gains above ₹1,25,000 per FY | First ₹1,25,000 of gains in a financial year is exempt. No indexation for equity funds. |
| Dividend / Distributions | Taxed in investor’s hands as per slab | AMCs may deduct TDS on dividends above thresholds; Dividend income is taxable as salary/other income per slab. |
| NRIs | Same capital gains rates apply; TDS may be deducted | NRIs should check treaty benefits and TDS mechanics with AMC / tax advisor. |
Practical tip: Always calculate post-tax returns when comparing funds, especially for short-term exits.
12. FAQ’s
Are equity mutual funds risky?
Yes — they carry market risk. Over long horizons (5+ years), risk typically smooths out, increasing the chances of good returns.
How long should I stay invested?
Yes — SIPs often start at ₹500–₹1,000, making equity funds accessible.
How are gains taxed?
STCG (≤12 months) at 20%; LTCG (>12 months) at 12.5% on gains above ₹1,25,000 (applies to transfers on/after 23 Jul 2024).
Active or passive — which should I choose?
Passive funds (index/ETFs) are low-cost and predictable; active funds can outperform but cost more. Use a mix: passive core + active satellite is a pragmatic approach.
13. Glossary — Quick Terms to Know
- NAV: Net Asset Value — price per unit of an MF.
- SIP: Systematic Investment Plan — regular periodic investment.
- AUM: Assets Under Management — fund size.
- Expense Ratio: Annual charge by the fund.
- XIRR / CAGR: Performance measures; XIRR for SIP returns.
- Exit Load: Fee for early withdrawal
14. Practical Checklists & Downloads
Fund Selection Checklist :
- Does the fund objective match my goal?
- Benchmark & category clear?
- 1/3/5-year returns vs benchmark & peers.
- Sharpe / Alpha / Std Dev reviewed.
- Expense ratio reasonable.
- Fund manager tenure and AUM checked.
- Exit load & taxation understood.
Portfolio Checklist (Annual Check)
- Review allocations and rebalance if drift >5%.
- Check for style drift or major manager changes.
- Move profits from satellite to core if needed.
