What is Equity Fund: What Makes It a Smart Investment Choice in 2025?

Want to plan for a secure financial future but hesitating to invest in stocks? Opting for a less risky investment option of equity mutual funds might be a solution for you. 

As of 2025, 5.20 crore Indians have already invested in mutual funds, representing 30.6% of the entire capital market participation. 

If you are considering joining them, keep reading this blog for a detailed look at what is equity fund, so you can make confident investment choices.

Quick Synopsis

• Equity funds invest mostly in company stocks and the rest in bonds, money market instruments, etc.
• Large, mid, small-cap, sectoral thematic, etc, are some types of equity funds.
• There is always market risk, as such funds have most of their underlying assets exposed to market volatility.

What is Equity Fund in Mutual Fund? 

As an investor, if you are wondering what is equity fund investment, you must note that it is an instrument that invests the majority of its assets in equities of publicly listed companies. 

When you choose an equity fund, the fund house pools your money with that of other investors and purchases shares in companies. To spread risk, fund houses purchase shares of companies from different sectors and seek capital appreciation as these stocks grow. 

Let us understand that with an example from an asset allocation perspective. For example, an equity mutual fund might have 80% or more assets allocated in company equities. 

The fund might allocate its remaining assets in debt instruments such as bonds, treasury bills, etc, and money market instruments. 

Different Types of Equity Funds to Invest in India

Now that you know the basics of what is equity fund, you must note how many types of equity funds there are in India before investing: 

Large-Cap Funds

As per the Securities and Exchange Board of India (SEBI) norms, large-cap equity funds must invest at least 80% of their assets across the top 100 companies in terms of capitalisation. Typically, such companies have a market cap of ₹20,000 crore or more and a high market share. 

Mid-Cap Funds

On the other hand, mid-cap funds must allocate at least 65% of their assets to mid-sized company stocks across India. Such companies typically have a market capitalisation between ₹5,000 and ₹20,000 crore. 

Small Cap Funds

Small-cap funds are also required to invest at least 65% of their assets in equities or equity-related securities of small-cap companies. While there is potential for optimised returns from such funds, risks are much higher as small-cap companies are highly sensitive to market volatility.

Multi-Cap Funds

If you encounter multi-cap funds while investing, you must know these are the funds that invest across large, mid and small-cap companies. Due to this approach, multi-cap funds provide you with diversified exposure in the equity market. 

Index Funds

You can consider an index fund as a specific category under mutual funds that replicates the performance of certain market indices. In India, these stocks follow market indices such as the Nifty of NSE and the Sensex of BSE. 

Other Fund Types

Other than the mentioned ones, there are multiple other types of funds in the market. They include sector, thematic, focused, dividend-yield funds, ELSS or Equity-Linked Savings Scheme, etc. 

Aside from equity fund investments, securely deposit your money and grow it with a fixed deposit. Download the Stable Money app, book an FD and earn up to 8.15% interest PA. 

Best-Performing Equity Funds to Invest in 2025

Understanding what is equity fund is not enough, as you need the specifics of the best-performing funds to ensure a possible optimised return: 

Benefits of Investing in Equity Funds

1. Affordability in Investment: As an investor, investing in mutual funds does not require a higher capital to start with. As per the SEBI norms, you can invest in equity funds via SIPs starting from ₹500.
2. Portfolio Diversification: Staying invested in one or two company stocks might result in losses if the market goes south. As equity funds invest in multiple company stocks, if one stock does not perform well, others might perform and reduce your risks. 
3. Easy Withdrawal Option: Most equity funds have no lock-in period as they are open-ended. Thus, you can withdraw your investment at your convenience. However, on average, mutual fund houses typically might impose a 1% exit load. 

Associated Risks of Equity Funds 

1. Market Volatility Risks: The security market is always volatile, and therefore, stock prices change rapidly. As most of the assets in an equity fund are invested in stocks, there is always a chance of loss due to overall market downturns. 
2. Sectoral Risks: Suppose you invest in sectoral funds that typically invest in companies from specific sectors such as energy, healthcare, etc. In case of any adversity in that sector, your fund investment might be affected. 

Who Should Invest in Equity Mutual Funds? 

Depending on investment horizon, risk tolerance, etc, here are some suitability factors for equity funds:

• An investor with a long-term investment horizon might find equity mutual funds suitable.
• Being exposed to market risks, you are suitable if you have a higher risk tolerance.
• If you are new to investing and do not have much knowledge or capital for direct stocks, this can be a great way to get started.

Final Word

As an investor, if you are curious about what is equity fund, these are the mutual funds that invest most of their assets in company stocks. However, investment in such a fund requires higher risk tolerance, longer investment horizon, etc, to realise possible optimised profit.