Fund category guide
Equity mutual funds: the eleven categories, and which ones you actually need
Equity funds pool money into shares and are the main way Indian households own the stock market. SEBI splits them into eleven categories, each with a fixed mandate. Most investors need two or three of them, not eleven.
Key takeaways
- Equity funds must hold at least 65% in equity; each SEBI category then fixes where that money goes.
- One fund house may run only one scheme per category, so the category is the main choice you make.
- Market cap drives behaviour: large caps fall 25-35% in bad markets, small caps 50-60%.
- Three or four funds cover almost every portfolio; more than that usually just duplicates holdings.
- Long-term gains are taxed at 12.5% above ₹1.25 lakh a year; short-term gains at 20%.
- Run an overlap check before adding a fund — duplication is the most common portfolio mistake.
What is an equity mutual fund?
An equity mutual fund pools money from many investors and buys shares with it, managed either actively by a fund manager or passively against an index. For tax purposes a scheme counts as equity-oriented when it holds more than 65% of its assets in Indian equity; most equity categories are required to hold considerably more than that.
Since SEBI’s 2017 categorisation, every fund house may run only one scheme per equity category, and each category has a defined mandate: minimum equity, permitted market caps, and in some cases a theme. That is why category choice determines most of your experience — an ICICI small cap fund and an SBI small cap fund have far more in common with each other than either has with a large cap fund from the same house.
The eleven categories are large cap, large & mid cap, mid cap, small cap, multi cap, flexi cap, dividend yield, value, contra, focused, sectoral or thematic, plus ELSS as a separate tax-saving scheme. Index funds sit outside this list as passive schemes tracking a stated index. Practical portfolios are built from four or five of these; the rest are specialised tools.
Types of Equity Mutual Funds
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Categories defined by how freely the manager may move money between market caps.
Flexi cap fund
At least 65% in equity with no cap restriction. The manager shifts between large, mid and small caps at will.
No cap limitsMulti cap fund
At least 75% in equity with a floor of 25% each in large, mid and small caps at all times.
25/25/25 floorLarge & mid cap fund
A minimum of 35% each in large caps and mid caps, so both sleeves stay meaningful.
35% + 35%Focused fund
At least 65% in equity but no more than 30 stocks, across any market cap.
Max 30 stocksWhich equity funds should you actually hold?
A workable equity portfolio needs three or four funds at most, and the roles should not overlap. The table below is the live screener's top equity schemes by three-year return — a place to start a shortlist rather than a portfolio, since a ranking like this fills up with whichever category has just had a good run.
The table below is ranked on three-year returns and refreshed from live scheme data. Judge any fund against the Nifty 500 TRI rather than against the Nifty 50 alone.
| Fund | AUM | 1Y | 3Y | 3Y volatility | Expense |
|---|---|---|---|---|---|
| Mirae Asset NYSE FANG+ ETF FoF Reg Gr | ₹2,707 Cr | 70.11% | 64.65% | 24.84% | 0.90% |
| Nippon India Taiwan Equity Reg Gr | ₹1,128 Cr | 99.93% | 53.76% | 36.18% | 2.53% |
| DSP World Gold Mining Overseas Equity Omni FoF Gr | ₹1,828 Cr | 19.00% | 51.10% | 36.23% | 3.18% |
| Mirae Asset S&P 500 Top 50 ETF FoF Reg Gr | ₹847 Cr | 59.62% | 48.65% | 19.73% | 0.90% |
| Kotak Silver ETF Fund of Fund Reg Growth | ₹1,004 Cr | 22.23% | 41.18% | 37.03% | 1.00% |
| UTI Silver ETF Fund of Fund Reg Gr | ₹655 Cr | 18.38% | 41.01% | 37.45% | 0.46% |
| Nippon India Silver ETF FOF Reg Gr | ₹4,561 Cr | 15.87% | 40.99% | 43.01% | 1.05% |
| Axis Silver Fund of Funds Reg Gr | ₹1,281 Cr | 14.67% | 40.94% | 37.43% | 0.65% |
| Category average | — | — | — | — | — |
Returns annualised (CAGR) for periods over one year, as reported for the plan listed. Expense ratios shown are for that plan; the direct plan of the same scheme carries a lower one. Past performance does not indicate future returns.
How do you build an equity portfolio?
Five decisions, in the order they matter. The first two decide almost everything; fund selection is the last and smallest.
Set the horizon before anything else
Money needed within three years does not belong in equity at all. Five years is the minimum for large caps, seven or more for mid and small caps.
Rule: under 3 years, use debt
Decide the market cap split
This is the real risk decision. A common moderate mix is 60-70% large cap, 20-30% mid cap and 10-15% small cap; a conservative one holds large caps and nothing else.
Rule: write the target split down, then rebalance to it
Choose active or passive per segment
In large caps, most active funds have trailed the index after fees — an index fund is the sensible default. In mid and small caps, active managers have added value more often.
Rule: passive core, active where it earns its fee
Keep the fund count low
Three or four funds cover every segment. Beyond that you own the same companies repeatedly, dilute your best ideas and create work for yourself at tax time.
Rule: 3-4 funds, overlap under 40%
Then pick the funds
Long record through a full cycle, rolling returns against the right benchmark, a low expense ratio in a direct plan, and a manager who was present for the numbers.
Rule: 7+ years, direct plan, benchmark-relative record
How do the main equity categories compare?
Market cap explains most of the difference in behaviour between equity funds. Everything else — style, sector, strategy — sits on top of that.
| Attribute | Large cap | Flexi cap | Small cap |
|---|---|---|---|
| Where it invests | Top 100 companies, min 80% | Any market cap, min 65% equity | Ranks 251 onward, min 65% |
| Typical volatility | Lower | Depends on the manager’s mix | Very high |
| Worst-case drawdown | 25-35% | 30-45% | 50-60% |
| Minimum horizon | 5 years | 5-7 years | 7-10 years |
| 10-year return band | 11-13% | 12-14% | 14-16% |
| Role in a portfolio | Core, first equity fund | Single-fund equity exposure | 10-20% satellite |
What would an equity SIP grow to?
Set a monthly amount, a horizon and a return assumption. The projection compounds monthly and assumes the SIP never stops — the second part is the harder one in practice.
Worked example: a ₹10,000 monthly SIP held for 15 years at 12% a year is ₹18,00,000 invested across 180 instalments. That projects to ₹50,45,760, of which ₹32,45,760 is estimated gains. The figure assumes a constant return; real equity returns vary year to year and can be negative, so treat it as arithmetic, not a forecast.
- Total invested
- ₹18,00,000
- Estimated gains
- ₹32,45,760
- In short
- ₹50.5L
A projection, not a promise. Actual returns will vary year to year and can be negative.
Who should invest in equity funds?
- You are investing money you will not need for at least five years.
- You want returns ahead of fixed deposits and inflation, and accept that the path will not be smooth.
- You can keep an SIP running through a falling market, which is where most of the long-run return is earned.
- You have an emergency fund in place, so a market fall never forces you to sell units.
What are the risks?
Market risk applies to every category
Every equity fund falls in a bear market. The category decides how far: roughly a third for large caps, more than half for small caps.
Behaviour is the biggest cost
Investor returns typically trail fund returns because money arrives after good years and leaves after bad ones. The fund is rarely the problem.
Overlap disguised as diversification
Five equity funds often mean owning the same twenty large companies five times. More funds add work, not protection.
Sequence risk near a goal
A fall in the final two years of a goal does far more damage than one early on. Shift towards debt as the date approaches rather than hoping for a recovery.
How are equity funds taxed?
A scheme holding more than 65% in Indian equity is treated as equity-oriented for tax. Tax is triggered on redemption or switch, not on notional growth.
Held 12 months or less
20%
Short-term capital gains, taxed at a flat 20% regardless of your income slab.
Held over 12 months
12.5%
Long-term capital gains, taxed at 12.5% without indexation on gains above the annual exemption.
Annual LTCG exemption
₹1.25 L
The first ₹1.25 lakh of long-term equity gains in a financial year is tax-free, across all equity funds and shares combined.
Rates as applicable to resident individuals for FY 2026-27 under the current capital gains regime. Surcharge and cess apply on top. Dividends from a fund are added to your income and taxed at your slab rate, with TDS above ₹10,000 in a year. Tax rules change; confirm your position with a tax adviser.
Terms you will meet on a fund factsheet
- NAV
- Net asset value — the per-unit value of the fund, published at the end of each business day.
- AUM
- Assets under management. Large AUM signals investor trust but can slow a manager down in less liquid names.
- Expense ratio
- The annual percentage of your investment charged for running the fund. Already deducted from the NAV you see.
- Direct vs regular plan
- Direct plans carry no distributor commission and therefore a lower expense ratio for the same portfolio.
- CAGR
- Compound annual growth rate — the smoothed annual return over a period longer than one year.
- Rolling return
- Returns measured over every possible start date in a period, which removes the luck of a single entry point.
- Standard deviation
- How much the fund’s returns swing around their average. Higher means a bumpier ride.
- Exit load
- A fee charged for redeeming early, commonly 1% within one year for equity funds.
Frequently asked questions
What is an equity mutual fund?
A scheme that invests predominantly in shares. For tax purposes it must hold more than 65% in Indian equity; SEBI’s eleven equity categories each set their own, usually higher, minimum along with rules on market cap or theme.
How many equity funds should I hold?
Three or four is enough for almost everyone: a core large cap or index fund, a flexi cap, and one mid or small cap satellite. Additional funds mostly duplicate holdings while adding monitoring and paperwork.
Which equity fund category is best for beginners?
A flexi cap fund or a Nifty 50 index fund. Both give broad equity exposure through a single SIP without requiring a view on market caps, and neither carries the drawdown depth of a mid or small cap fund.
How are equity mutual funds taxed in India?
Units held twelve months or less are taxed at 20% as short-term capital gains. Units held longer are taxed at 12.5% as long-term capital gains, with the first ₹1.25 lakh of long-term equity gains in a financial year exempt across all equity investments.
What returns do equity funds give?
Over rolling ten-year periods the broad categories have delivered roughly 11-13% for large caps, 12-14% for flexi caps, 13-15% for mid caps and 14-16% for small caps. Any single year can be sharply negative.
SIP or lump sum for equity funds?
SIP for regular savings, because it removes the need to judge valuations and matches how income arrives. For a large existing sum, staggering it over 6-24 months is the usual compromise between market risk and being out of the market.
Not sure how many equity funds you need?
Talk to a Dhan Saarthi advisor. Twenty minutes on your goals, horizon and existing holdings, and you get a portfolio of three or four funds instead of a drawer full of them.
Disclaimer
Mutual fund investments are subject to market risk. Read all scheme related documents carefully before investing. Past performance is not indicative of future results, and the value of your investment can go down as well as up.
This page is educational content on a fund category and is not investment advice, a research report, or a recommendation to buy or sell any specific scheme. Returns shown are illustrative placeholders and not live NAV-based figures.
Dhan Saarthi is a mutual fund distribution platform. Fund selection should reflect your own goals, horizon, tax position and risk tolerance. Consider consulting a SEBI-registered investment adviser before acting on anything here.
Tax rates referenced apply to resident individual investors under the capital gains regime in force at the date of publication and may change. Calculator outputs are arithmetic projections based on the assumptions you enter, not guarantees.