Which type of Equity Mutual Fund should you choose?
- Manan Mehta
- Nov 20
- 8 min read
Equity mutual funds are categorized by market capitalization (size of companies), investment strategy, and focus. Choosing the right mix can mean the difference between 10% annual returns and 16%+ returns over 25 years.
This comprehensive guide explains every type of equity fund available to Indian investors and how to allocate your money across them for optimal risk-adjusted returns.
Index
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How Funds Are Classified
SEBI (Securities and Exchange Board of India) classifies equity funds based on where companies fall in India's stock market hierarchy, measured by market cap (stock price × shares outstanding).
Large Cap Stocks: Top 100 Companies by Market Cap
What they are: India's 100 largest companies (Reliance, TCS, HDFC Bank, Infosys, ITC, etc.)
Market cap range: Above ₹20,000 crore each
Risk level: Low to moderate
Volatility: 12-18% standard deviation
Historical returns: 10-14% CAGR
Use case: Safety, stable dividends, defensive holding
Mid Cap Stocks: 101st-250th Largest Companies
What they are: ₹5,000-20,000 crore market cap (emerging leaders, niche dominant companies)
Examples: Lupin, Gail, Federal Bank, Endurance Technologies
Risk level: Moderate
Volatility: 20-28% standard deviation
Historical returns: 13-17% CAGR
Use case: Growth with moderate volatility, 5-10 year horizons
Small Cap Stocks: 251st+ Largest Companies
What they are: Below ₹5,000 crore market cap (emerging companies, high-risk-high-reward)
Examples: Happiest Minds, Newtech, Bosch, Sectorally focused leaders
Risk level: High
Volatility: 28-40%+ standard deviation
Historical returns: 15-22% CAGR (but with 40-60% drawdowns)
Use case: Wealth creation, 8+ year horizons only
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The 8 Types of Equity Mutual Funds in India
1. Large Cap Mutual Funds (Safest Equity Option)
What it invests in: Minimum 80% in top 100 stocks; rest in mid-cap or debt
Fund size range: ₹500 crore - ₹1 lakh+ crore
Expense ratio: 0.5-1.5%
SEBI mandate: Minimum 80% in large cap
Advantages:
Dividend-paying blue-chip stocks
Defensive in bear markets (-30% vs -50% for small caps)
Suit conservative investors nearing retirement
Liquid (easy to exit)
Disadvantages:
Lower growth potential vs mid/small cap
Modest 10-14% returns may not beat inflation by enough
Limited upside in bull markets
Who should invest: Conservative investors, those in 50s-60s, risk-averse beginners
2. Mid Cap Mutual Funds (Balanced Growth)
What it invests in: Minimum 65% in 101-250 stocks; rest in large or small cap Expense ratio: 0.7-1.6% SEBI mandate: 65% mid cap minimum
Advantages:
Sweet spot: 15-17% returns with manageable volatility
Companies growing 2-3X size (multiplier effect)
Established businesses with proven management
Less volatile than small caps; more growth than large caps
Disadvantages:
Less liquidity than large caps
Can fall 35-45% in corrections
Lower dividend yields than large caps
Who should invest: Investors in 30s-50s, moderate risk tolerance, 10-15 year horizons
3. Small Cap Mutual Funds (Maximum Growth, Maximum Volatility)
What it invests in: Minimum 65% in 251+ stocks; rest anywhere
Expense ratio: 0.9-1.8%
SEBI mandate: 65% small cap minimum
Advantages:
Highest long-term returns (18-22% CAGR historically)
Exponential growth (5-10X returns over 20 years)
Emerging industry leaders and disruptors
Disadvantages:
Can fall 40-60% in bear markets
High volatility = emotional testing
Liquidity concerns for very small positions
Many fail; not all survive 10 years
Who should invest: Aggressive investors in 20s-40s, 15+ year horizons only, high risk tolerance
4. Flexi-Cap (Multi-Cap) Funds: The Goldilocks Category
What it invests in: Any mix of large/mid/small cap (typically 40-60% large, 20-35% mid, 10-20% small)
Fund manager flexibility: Maximum - can shift allocation dynamically
Expense ratio: 0.6-1.5% SEBI mandate: No minimum in any category
Why flexi-cap is special:
Managers can tilt toward growth during bull markets
Managers can shift defensive during bear markets
Captures upside from all three categories
More stable than single-cap category funds
Advantages:
Best risk-adjusted returns (highest Sharpe ratio)
Automatic diversification across cap sizes
Manager skill actively used
Suitable for all time horizons
Disadvantages:
Manager-dependent performance (skill variable)
Slightly higher expense ratio
Hard to predict allocation at any time
Who should invest: Most investors; core holding; simple one-fund portfolio works
5. Index Funds: The Passive Alternative
What it invests in: Tracks Nifty 50, Nifty 100, Sensex, or broader indices
Expense ratio: 0.03-0.15% (incredibly cheap)
Strategy: No manager; computer-driven rebalancing
Performance: Exactly matches index minus expense ratio
Advantages:
Transparent (you know exact holdings)
Unbeatable expense ratios (0.05% vs 1% for active = 0.95% annual advantage)
Outperforms 85% of active managers after fees
Set-and-forget simplicity
Best for beginners
Disadvantages:
Can't beat market (by definition)
Captures entire market volatility
No defensive positioning in downturns
Nifty 50 concentrated in 5 stocks (Reliance, TCS, HDFC Bank, etc.)
Who should invest: Passive investors, index believers, cost-conscious, those without time to pick funds
6. ELSS (Equity Linked Savings Schemes): Tax-Saving Funds
What it invests in: 80%+ equity (typically flexi-cap strategy)
Tax benefit: ₹1.5 lakh deduction under Section 80C
Lock-in period: 3 years (shortest among 80C options)
Expense ratio: 0.6-1.4%
Why choose ELSS:
Tax deduction (saves 20-30% tax on ₹1.5L = ₹30-45K savings)
Short 3-year lock-in vs 15-year PPF
Equity returns vs 6-8% debt returns
Ideal if maximizing 80C allocation
Effective after-tax returns: 16.8% - 30% tax on gains = 11.8% after-tax (best of 80C options)
Disadvantages:
3-year lock-in (can't access for 3 years)
Not suitable for emergency needs
Should only invest if won't need money for 3+ years
Who should invest: High-income earners (30%+ tax bracket), those maxing out 80C, 3+ year horizon
7. Dividend Yield/Dividend Focus Funds
What it invests in: Companies with 3%+ dividend yields (Reliance, State Bank, Coal India, NTPC, ITC) Strategy: Regular income through dividends, not capital appreciation Dividend frequency: Monthly, quarterly, or annual payouts
Returns structure:
Capital appreciation: 5-8% (dividend stocks grow slower)
Dividend yield: 3-4%
Total return: 8-12% CAGR
Who should invest: Retirees needing regular income, those in 60s+, people living off portfolios
Warning: Dividend focus often underperforms growth funds. You pay capital gains on price appreciation + dividend tax. Better off in growth + SWP (Systematic Withdrawal Plan)
8. Sectoral/Thematic Funds: Specialist Bets
Categories:
Banking sector: Banks, NBFCs, financial services
Technology sector: IT companies, software, startups
Pharma sector: Drug makers, medical devices
Infrastructure: Roads, airports, power, ports
Consumer: FMCG, retail, consumer discretionary
PSU stocks: Government-owned enterprises
Returns: Highly variable (sector dependent)Risk: Concentrated risk; entire sector can underperform
Who should invest: Advanced investors with sector conviction only (not recommended for beginners)
If you want someone to assist you with your investments, feel free to contact us. Our team of experts will be happy to help. You can also email us at help@reymanwealth.com
Equity Fund Allocation Strategy: Samples
Now that you understand types, how do you allocate across them?
Sample 1: The Classic Beginner Portfolio
Total allocation: ₹1,00,000
Fund Type | Allocation | Amount | Rationale |
Index Fund (Nifty 50) | 50% | ₹50,000 | Core stability, low cost, high quality |
Flexi-Cap Fund | 30% | ₹30,000 | Growth + manager flexibility |
Mid-Cap Fund | 20% | ₹20,000 | Growth accelerant, emerging leaders |
Sample 2: The Balanced Growth Portfolio (30s-40s)
Total allocation: ₹2,00,000
Fund Type | Allocation | Amount | Rationale |
Index Fund (Nifty 50) | 35% | ₹70,000 | Core, cheapest, beats 85% managers |
Flexi-Cap/Multi-Cap | 30% | ₹60,000 | Manager skill, diversification |
Mid-Cap Fund | 20% | ₹40,000 | Growth multiplier |
Small-Cap Fund | 10% | ₹20,000 | Wealth creation (if 15+ year horizon) |
ELSS | 5% | ₹15,000 | Tax benefits |
Sample 3: The Aggressive Growth Portfolio (20s-30s, 15+ Year Horizon)
Total allocation: ₹3,00,000
Fund Type | Allocation | Amount | Rationale |
Index Fund (Nifty 50 or Nifty Next 50) | 25% | ₹75,000 | Ballast, quality |
Flexi-Cap Fund | 30% | ₹90,000 | Growth with discipline |
Mid-Cap Fund | 25% | ₹75,000 | Multiple expansion |
Small-Cap Fund | 15% | ₹45,000 | Wealth multiplication |
ELSS | 5% | ₹15,000 | Tax benefits |
Sample 4: The Conservative Income Portfolio (50s+)
Total allocation: ₹3,00,000
Fund Type | Allocation | Amount | Rationale |
Index Fund (Nifty 50) | 40% | ₹1,20,000 | Stability, dividends, low cost |
Large-Cap Fund | 25% | ₹75,000 | Blue chips, dividends, safety |
Mid-Cap Fund | 15% | ₹45,000 | Some growth (inflation hedge) |
Dividend Yield Funds | 10% | ₹30,000 | Regular income |
Small-Cap | 0% | - | Not suitable |
Flexi-Cap | 10% | ₹30,000 | Manager skill for stability |
If you want someone to assist you with your investments, feel free to contact us. Our team of experts will be happy to help. You can also email us at help@reymanwealth.com
The Simplified One-Fund Approach
If complexity paralyzes you: Just pick ONE good flexi-cap fund and forget about it Examples:
Parag Parikh Flexi Cap Direct: Best performer + lowest ER
ICICI Prudential Flexi Cap: Consistent, large AUM
HDFC Multi Cap: Brand trust, good fund
Why one fund works:
Flexi-cap automatically diversifies across cap sizes
Manager adjusts allocation dynamically
Expense ratio still low (0.7-1%)
You're 80% as good as optimal allocation with 20% of complexity
Rebalancing: Maintaining Your Target Allocation
Your allocation drifts over time as different categories grow at different rates.
Example:
Started: 40% large, 35% mid, 25% small
After 3 years: 48% large (outperformed), 30% mid, 22% small
Action: Sell large-cap, buy small-cap to restore 40-35-25
Rebalancing frequency: Annually (April) or when any category drifts >5%
Tax implication: Rebalancing triggers capital gains. Do it in low-income year or use new SIP contributions instead of selling
The Index vs Active Debate
Index Funds Will Win If:
You're a beginner (don't know how to pick)
You want low costs (0.05% ER)
You value simplicity
You don't have 10 hours/year to monitor
Active Funds Can Win If:
Manager has proven 10+ year track record
You pick funds in bottom decile of expense ratio (0.6-0.8%)
Manager can time sectors/valuations
You monitor and switch when underperformance persistent
Reality: 85% of active managers underperform index. 15% outperform. You probably can't identify the 15% in advance.
Recommendation: Core 70% index, Satellite 30% active if you must
How to Implement Your Allocation
Step 1: Decide Your Profile
Age: 20s / 30s / 40s / 50s / 60s?
Risk tolerance: Conservative / Moderate / Aggressive?
Time horizon: 5 years / 10 years / 20+ years?
Purpose: Retirement / House / Education / General wealth?
Step 2: Pick Your Allocation
Use provided templates above based on your profile
Step 3: Select Specific Funds
Choose 2-4 funds max (don't over-diversify)
Verify they're DIRECT plans
Check expense ratio <0.8% (active) or <0.15% (index)
Read 5-year track record
Step 4: Open Mutual Fund Account
Use platform like Groww, Kuvera, Zerodha Coin
Step 5: Start SIPs
Distribute monthly investment across funds per allocation
Set auto-debit
Increase SIP annually by 10-15%
Step 6: Rebalance Annually
Check allocation drift
If >5% deviation, buy underweight category
Use new SIP contributions vs selling if possible
Bottom Line: Your Equity Fund Roadmap
For complete beginners: Start with single Nifty 50 Index Fund, ₹1,000 monthly SIP. Increase complexity only after understanding basics.
For early career (25-35): 40% index + 30% flexi-cap + 20% mid-cap + 10% small-cap.
For mid-career (35-50): 35% index + 30% flexi-cap + 20% mid-cap + 10% small-cap + 5% ELSS.
For late career (50+): 40% index (large-cap) + 25% large-cap + 15% mid-cap + 20% other (dividend/flexi-cap).
For the lazy: Single fund: Parag Parikh Flexi Cap. Done.
Start today. The best time to plant a tree was 20 years ago. The second best time is now.
If you want someone to assist you with your investments, feel free to contact us. Our team of experts will be happy to help. You can also email us at help@reymanwealth.com
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