Equity funds invest in stocks. The objective of an equity fund is long-term growth through capital gains, although historically dividends have also been an important source of total return. They can be sector specific, which only invests in stocks of specific sector e.g. automobile, infrastructure, IT, etc. The Capital Gain becomes non-taxable if you keep the investment for at least a year. Equity Funds have a moderately high risk but are also considered better in terms of high return. Usually, there is 1% exit load if you take out money before the first year of investment is up.

Equity funds can be distinguished by several properties. Funds can have style, for example, value or growth. Funds may invest in solely the securities from one country, or from many countries. Funds can also focus on size of company, that is, small-cap, large-cap, mid-cap. Funds which involve some component of stock picking are said to be actively managed, whereas index funds try as well as possible to mirror specific stock market indices.

Returns One Can Expect

When it comes to money management, financial experts always emphasise the importance of financial goals. These goals can either be short-term (1-3 years), medium-term (4-7 years) and long-term (more than 7 years).

Among equity funds, diversified funds have given mouth-watering returns for a decade or so. Investing in diversified equity funds is for those who want to invest across sectors. Among such funds, large-cap funds are known to give stable returns.

For those who are ready to risk, mid-cap funds stand a chance. And, for those who are willing to stomach a significantly higher risk than mid-caps, small-caps have performed well for the last three years.

One can expect bonanza of gains, if invested for long term because of stability. For short term (less than 3 years) one can't say anything as it can be as high as 50% or as low as 2%. People mainly invest for long term to get fruitful benefits.

Different Types of Equity Funds?

  • Index Funds
  • Growth Funds
  • Value Funds
  • Sector Funds
  • Income Funds
  • Balanced Funds
  • Asset Allocation Funds
  • Fund of Funds
  • Hedge Funds

Tax Laws On Equity Funds?

Returns from an equity mutual fund are treated as long term capital gains if investments are held for more than a year. Such returns are completely exempt from income tax according to the current laws. However, if investments are held for one year or less, the returns are taxed under short term capital gains. Such returns are taxed at 15 per cent.

How Much Can One Invest?

There are certain schemes in equity like ELSS which can save you tax, but lock-in period is of 3 years. You can invest as much as you like in that scheme, but the maximum tax benefit is of Rs. 1.5 lakhs. Your salary will be taxed after deducting money invested in ELSS schemes (maximum Rs. 1.5 lakhs).

For other schemes, there is no such criteria and you can invest according to your will. One can start systematic monthly investment with as low as Rs. 500 in most funds though some mutual funds have higher minimum investment criteria.


If you are looking for steady growth of capital and are not willing to take a lot of risk, large cap equity funds are best for you.Equity mutual funds invests the collected amount in companies listed in stock market. Size of these companies depend on their market capital. It is defined by the number of shares issued by them multiplied by value of each share.

When a mutual fund is categorised in terms of market capital, it indicates the size of the companies that mutual fund invests in. Large cap mutual funds invest companies with market capital of at least Rs. 20,000 Cr.

Companies with a large market capital have a history of consistent growth which makes them a wise choice to get good returns with lesser risk compared to mid cap and small cap companies.


If you are looking for high returns and have some surplus money to put aside for a few years, mid cap mutual funds are best for you. Equity mutual funds invests the collected amount in companies listed in stock market. Size of these companies depend on their market capital. It is defined by the number of shares issued by them multiplied by value of each share.

Mid cap mutual funds invest in companies with market capital ranging from Rs. 500 Cr to Rs. 20000 Cr.

Medium sized companies can give potential capital downfall in the short term but have higher chances of giving high returns in the long term.


If you have surplus cash which you can risk to build your wealth in the long term, small cap mutual funds are best for you. Small cap companies present a greater capital gain but with a high degree of risk.

Small cap mutual funds invests companies with market capital of up to Rs. 500 Cr.

Small companies are more volatile in terms of stock price and can give potential capital downfall in the short term but very high returns in the long run.


Diversified funds contain a wide array of securities to reduce the amount of risk in the fund. Actively maintaining diversification prevents events that affect one sector from affecting an entire portfolio, make large losses less likely. It is also known as multi cap funds.


Arbitrage funds leverage the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the asset. These funds are hybrid in nature as they have the provision of investing a sizeable portion of the portfolio in debt markets. They strive to maintain the equity fund status by investing at least 65% of the corpus in stocks.


An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the SENSEX or NIFTY. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.


A mutual fund which rather than holding a diversified mix of equity positions focuses on a limited number stocks in a limited number of sectors. Unlike many funds which hold positions in excess of 100 companies, sector funds generally will hold less than 20-30 types of stocks.


If you are looking to save tax and keep you money invested for at least 3 years, ELSS mutual funds are the best tax-saving investment tool. ELSS mutual funds comes with dual benefit of tax-saving and wealth building. Like other equity mutual funds, ELSS mutual funds invest your money into stock market to yield high returns. Most ELSS funds have a diversified portfolio of large cap, mid cap and small cap stocks.

You can invest uptoRs. 1,50,000 and save uptoRs. 45000 of taxes every year under section 80C of Indian Income Tax Act. Also, the capital gains from ELSS funds are completely tax-free. ELSS funds have a lock-in period of 3 years which is lesser than all other tax-saving investment options.