Equity Mutual Funds

Equity mutual funds invest in shares of listed companies. Managed by professional asset management companies, these equity mutual funds pool money from investors and invest in stocks of various categories. So, when you invest in an equity mutual fund, you also become a shareholder of the companies they invest in. The purpose of these mutual funds is to generate significant returns for their investors. Let’s look at the top equity mutual funds in 2025, how these mutual funds operate and which fund is the right one for you

Best Equity Mutual Funds

List of the top-performing equity mutual funds sorted by returns with their AUM and Expense Ratio.

What Are Equity Mutual Funds?

Equity mutual funds invest in stocks of different companies. The stocks these funds invest in are typically selected based on their market capitalization as defined by SEBI (Securities and Exchange Board of India) or aligned with specific investment themes or tax considerations.

As per current SEBI Mutual Fund Regulations, an equity mutual fund is required to invest at least 65% of their investments in equity and equity-related instruments. Investors can choose to invest in lump sum or set up a SIP in these funds. By investing in a diverse range of categories, equity mutual funds enable investors to diversify their portfolios across multiple industries.

How Are Equity Mutual Funds Categorized?

Equity mutual funds are categorized based on market capitalization, investment strategies, etc ensuring clarity for investors regarding the types of companies these funds invest in. Here are the different types of equity mutual funds:

Investment Strategy-Based Categories

Thematic or Sectoral Funds: If you're excited about a specific investment area like tech or healthcare, this might be for you. These funds focus on a particular industry or theme, but remember, this comes with higher risk since you're not spreading your investment across different sectors.

Focused Equity Fund: Here, the fund invests in a small group of about 30 companies. The idea is that by focusing on fewer stocks, the fund can concentrate on finding the best opportunities.

Contra Equity Fund: Think of this as a "rebel" fund. It goes against the grain, investing in companies that are currently underperforming, with the belief that they will bounce back in the long run.

Dividend Yield Equity Fund: This equity fund invests primarily in stocks of companies known for consistently paying high dividends. And provides a steady stream of income through dividend payouts.

Market Capitalization-Based Categories

SEBI has defined companies to be ordered as per their market capitalization. These include:

Large-Cap Funds: These funds invest in the top 100 biggest companies. These 100 companies and others followed by it are ranked on the basis of their market capitalization. Since these are well-established businesses, it's a safer bet for those looking for steady, long-term growth. Fund managers are required to invest at least 80% of their funds in large-cap stocks.

Mid-Cap Funds: Here, the focus is on medium-sized companies ranking 101st to 250th on the stock exchange. These funds come with a bit more risk than large-cap funds but also offer the potential for higher returns. Under this category, the fund manager is required to invest at least 65% of their funds in mid-cap stocks.

Small-Cap Funds: Small-cap funds invest in smaller companies ranked 251-500. These are riskier but can deliver significant gains if the companies grow. In small-cap funds again, at least 65% of the funds are required to be invested in stocks of small-cap companies.

Multi-Cap Funds: A good mix of large, mid, and small-cap companies. These funds give you the best of all worlds by diversifying across company sizes, balancing risk and reward.

Large and Mid-Cap Funds: A blend of large and mid-sized companies, giving you a mix of stability and growth potential.

Tax Treatment-Based Categories

Equity Linked Savings Scheme (ELSS): This is a tax-saving option where you can invest in equity funds and save on taxes. It has a lock-in period of three years and is great if you’re looking for both tax benefits and long-term growth.

Investment Style-Based Categories

Active Funds: In these funds, a fund manager actively picks and chooses stocks to buy, aiming to outperform the market.

Passive Funds: These funds just track a particular market index, like the Nifty 50. The fund manager's job here is to replicate the picked stocks actively.

How Do Equity Mutual Funds Work ?

Every mutual fund has a fund manager who leverages his expertise to actively or passively manage these funds. Equity mutual funds are first sorted on the basis of their market capitalization, theme or tax benefits. Once the category is defined the fund manager selects stocks based on the investment objective of the fund. 

The fund manager then uses his expertise to actively buy or sell stocks to meet the target goal of the fund. The results from actively buying or selling stocks are then measured on a daily basis. However, many factors such as market and economic conditions play a role when the performance of the fund is looked at.

To put it simply, stock prices fluctuate and when a fund manager buys a stock at a lower price and sells it for a profit, they lock in gains. This profit is then reinvested into another stock. This cyclical behaviour of investments results in the compounding of funds. The returns on your initial investments are then attributed to you. 

When you invest in a mutual fund you can either choose to stay invested for as long as you wish or redeem your fund when your investment goal is met. Another source of return is when a stock distributes a dividend, depending on the fund type, the fund manager chooses to reinvest or distribute your dividends in the mutual fund.

Advantages and Disadvantages of Equity Mutual Funds 

To provide a clearer perspective, we have listed the advantages and disadvantages below.

Advantages:

Potential for High Returns: Equity mutual funds have the potential to generate substantial returns over the long term because they invest primarily in stocks. This happens because of the growth of companies and the overall economy, which can lead to an increase in stock prices.

Professional Management: When you invest in equity mutual funds, you benefit from the expertise of professional fund managers. These managers are skilled professionals who analyze market trends, evaluate companies, and make informed investment decisions on behalf of the fund's investors. They have access to research, tools, and resources that individual investors may not have. 

Liquidity: Equity mutual funds offer a high liquidity; meaning that you can easily buy or sell your units whenever you need to access your money. Unlike certain investments, such as real estate or fixed deposits, which may take time to liquidate, mutual funds allow you to redeem your units on any business day at the current Net Asset Value (NAV). 

Disadvantages:

Market Risk: Equity mutual funds are subject to market risk, so the value of the fund can fluctuate based on the performance of the underlying stocks. When the stock market experiences volatility, equity mutual funds can see significant swings in their NAVs. This volatility is particularly impactful in the short term, as the market can react quickly to news and events. So be prepared for the possibility of losses, especially if you need to redeem the units during a market downturn.

Management Fees: Investing in equity mutual funds comes with certain fees to cover the expenses associated with running the fund, administrative expenses, etc. The expense ratio is typically expressed as a percentage of the fund's assets and is deducted from the fund's returns before they are distributed to you. While the fees may seem small, they can have a significant impact on long-term returns, especially in low-return environments.

Short-Term Volatility: Equity mutual funds can experience significant price swings in the short term because of the volatility of the stock market. This volatility can be unsettling, especially if you are new to the market or have a low tolerance for risk.  

Who Should Invest in Equity Mutual Funds?

Equity mutual funds are suitable for investors who:

• Have a long-term investment horizon.
• Are comfortable with market risk.
• Seek potential for high returns.
• Want to benefit from professional management.

Key Things to Keep in Mind While Investing in Equity Mutual Funds

Risk Tolerance: Assess your ability to withstand market fluctuations.

Fund Selection: Choose a fund that aligns with your investment goals and risk profile.

Investment Horizon: Consider your long-term financial objectives.

Monitoring and Rebalancing: Regularly review your investments and make adjustments as needed.

How To Choose The Best Equity Mutual Funds?

Knowing how to pick the right fund is the first step towards knowing you’re on the right path in your investment journey. On the INDmoney app, we give you a single view of all the key metrics of any fund. Let’s understand how you can use these metrics to analyse and arrive on a conclusion:

The first step in analyzing different mutual funds is understanding the concept of benchmark. Every mutual fund has a benchmark against which its performance is measured. You compare the performance of the fund you wish to invest in with its benchmark multiple times in this analysis journey. 

For example, the benchmark for a mid-cap mutual fund would most likely be NIFTY mid-cap 150. Similarly, for a small-cap mutual fund, the benchmark would be NIFTY Small Cap 250. If the fund of your choice matches or beats its benchmark performance, it’s an indicator of good fund performance.

Next, there are some technical metrics that you need to look at when analyzing your equity mutual funds. For simplicity purposes, let’s take two funds as an example and the key metric we need to look at:

Let’s start with Alpha. Alpha is the return a fund generates above its benchmarks. In simple terms, if the benchmark index delivers a 10% return and the mutual fund provides a 12% return, the Alpha of the fund is +2%. The higher the Alpha of the fund the better it is. In the above table, clearly Fund A is the winner since its Alpha is much higher than that of Fund B.

The next important metric you should consider is the Beta of a fund. Beta is a measurement of relative risk in comparison to its benchmark. If the Beta of a fund is equal to 1, it indicates that it is as risky as its benchmark. If it's <1 it is less risky, while if it is >1, it is riskier than its benchmark. In the above example, fund B indicates that it is more volatile than fund A.

Moving on, Sharpe Ratio is a risk-adjusted return metric. Sharpe ratio basically looks at the return of a fund and the risk it took to get that return. What it means is how much risk did the fund had to take to arrive at its return. Looking at the example above, fund A has a Sharpe ratio of 1.14 and fund B 0.97, this indicates that fund A is offering a better return for the risk it is taking.

Finally, consider the Standard Deviation of your mutual fund. This metric tells you how risky the fund is. In this case, the higher the standard deviation, the more volatile it is. For example, fund B here is more volatile than fund A since it has a standard deviation of 14.83% which is much higher than that of 13.53%.

Coming to Expense Ratio of an equity mutual fund. This is a charge levied by asset management companies in return for the expenses they bear to manage your mutual funds. In the above example fund A has an expense ratio of 0.88% while fund B has an expense ratio of 0.61%. This goes without saying that a fund that has a lower expense ratio will be more suitable as the amount saved on these charges add to your total return.

CAGR stands for compounded annual growth rate. This metric indicates how much a fund has grown on an average year on year. This helps us understand average growth on an investment over multiple years. Referencing the above example once again, fund A has a much higher CAGR than fund B.

If you’re able to draw a comparison basis on the above metrics, it gives you a clear picture and clarity on which fund is the right investment choice for you.

How Much Tax Do I Have To Pay On Equity Mutual Funds?

Investors have to pay taxes on gains made from selling their mutual funds. The tax is called capital gains tax and depends on your holding period. 

If you sell your investments within 12 months, it’s called a Short-term Capital Gain (STCG). If you invested in a small-cap fund for less than 12 months, gains earned are taxed at a flat rate of 20%. 

Similarly, if you sold your investments after a period of 12 months, Long-term Capital Gains (LTCG) are levied. Gains in the long-term are exempted up to ₹1.25 lakh taxes. Any gain above this amount is taxable at 12.5%.

Let’s understand this with an example: Say you invested ₹5 lakhs in an equity mutual fund. Here’s how the tax would apply:

Case 1: You sell after 10 months for ₹6 lakhs. (STCG applicable)

• Gain: ₹1 lakh (₹6 lakhs - ₹5 lakhs).
• Tax: 20% of ₹1 lakh = ₹20,000.

Case 2: You sell after 15 months for ₹7 lakhs. (LTCG applicable)

• Gain: ₹2 lakhs (₹7 lakhs - ₹5 lakhs).
• Tax-free amount: ₹1.25 lakh.
• Taxable amount: ₹75,000 (₹2 lakhs - ₹1.25 lakhs).
• Tax: 12.5% of ₹75,000 = ₹9,375.

This shows how long-term investing in a mutual fund not only leverages compounding but also provides tax benefits for gains up to ₹1.25 lakh.

Dividends are periodic payments made by mutual funds to their investors, usually out of the profits earned from the fund’s investments. Dividends received from equity mutual funds are added to your total income and taxed as per your applicable income tax slab rate.

How Do I Invest In Equity Mutual Funds?

To invest in equity  mutual funds, open the INDmoney app and follow the below steps:

Step 1: Create a demat account, it is free and only takes a couple of minutes.
Step 2: Head to the ‘Mutual Funds’ section from the bottom menu bar.
Step 3: Look for ‘Equity Mutual Funds’ or directly search for equity funds in the search bar.
Step 4: Select the fund you wish to invest in. Choose whether you want to make a lump sum investment or set up a SIP.

Step 5: Add amount, choose frequency and set up UPI autopay in case of SIP. 

Step 6: Confirm to begin your investment.