Equity funds are mutual funds that primarily invest in company shares. The fund collects money from many small and big investors. It then uses that money to buy shares of different companies. For example, an equity fund may invest in 30, 50, or even more companies. So your money is spread across many stocks.

When you invest in an equity mutual fund, you don’t buy individual shares. You buy a unit of the mutual fund, and that fund buys shares for you. Depending on its fund type and mandate, the fund may invest in large-cap, mid-cap, small-cap, undervalued, or sector-specific companies. A fund manager handles the fund and decides which shares to buy, hold or sell based on the fund’s goal.

Equity funds may not be a suitable choice for everyone. Consider investing if you:

• Have a long time horizon: Equity funds can be a good choice if you can stay invested for 5 years or more. This gives your money more time to grow. It also helps you handle market fluctuations more smoothly.
• Don’t want to pick individual shares: Choosing individual shares can be daunting. You need to study different companies before investing. On the other hand, equity funds give you a ready-made basket of stocks, managed by an expert fund manager.
• Want to build wealth over time: If your goal is to build wealth and FIRE, equity funds give you the right exposure to market growth. However, returns are not fixed. Your money can grow as the companies the fund invests in grow.
• Can handle market volatility: Sometimes markets can move sharply, and your investments can fluctuate. If you can stay invested and avoid panic selling, equity funds can be a good option for growing wealth.

Equity funds collect money from multiple small and big investors (via SIP or lump-sum investment) and use it to build a diversified portfolio of 30-50+ company shares.

Imagine you invest ₹5,000 in an equity fund when its net asset value (NAV) is ₹50. You get 100 units (₹5,000 / ₹50).

This ₹5,000 is automatically split across all the companies in the fund’s portfolio based on the predefined allocation percentage.

As those companies' share prices increase, the fund’s NAV rises. If NAV rises from ₹50 to ₹60, your 100 units are now worth ₹6,000 (a profit of ₹1,000). If the stock prices decline, the NAV may drop to ₹45, bringing your investment value to ₹4,500.

Throughout this journey, a professional fund manager continuously tracks the market and decides which stocks to buy, hold, or sell based on the scheme's rules.

There are many types of equity funds available to invest in, depending on the companies, risk levels, and investment style, such as:

• Large Cap Funds: These funds mainly invest in large-cap companies. These are the top 100 companies (Ranked 1 to 100) by market capitalisation, that is, market value (current market price x total outstanding shares). They are also called blue-chip funds.
• Mid Cap Funds: These funds invest in mid-cap companies. These are ranked from 101 to 250 companies by market capitalisation. They sit between large-cap and small-cap companies.
• Small Cap Funds: These funds invest in small-cap companies, starting from rank 251 onwards. These funds have higher volatility because small companies can be more sensitive to market and economic changes.
• Multi Cap Funds: These funds invest across large-cap, mid-cap, and small-cap companies. The funds invested in each category may differ, subject to a minimum allocation of 25% in each category.
• Flexi Cap Funds: These funds invest in large-cap, mid-cap, and small-cap companies, but the fund manager has complete flexibility to invest across different companies, without a minimum threshold.
• Bluechip Funds: Another name for large-cap funds. These funds particularly invest in blue-chip companies, that is, financially strong and well-established businesses. They allocate at least 80% to large-cap companies.
• Sectoral Funds: These funds invest in stocks of companies from a particular sector, such as IT, defence, pharma, banking, auto, etc. The performance of sectoral funds completely depends on the overall sectoral performance.
• Dividend Yield Funds: These funds invest in companies that offer relatively high dividend yields. The focus is on dividend income as well as capital appreciation.
• Value Funds: These funds follow a value-investing strategy, that is, investing in fundamentally strong companies that are trading at lower prices. The fund manager picks such undervalued companies based on fundamental analysis.
• Focused Funds: These funds invest in only a limited number of stocks, up to 30. The performance of this concentrated portfolio depends heavily on the selected companies.
• Contra Funds: Also known as contrarian funds, these mutual funds invest in stocks and sectors that are currently unpopular or heavily beaten down. They operate on a “swimming against the tide” philosophy.
• ELSS Funds: ELSS (Equity Linked Savings Scheme) offers a tax benefit of up to ₹1.5 lakh under Section 80C. However, it comes with a 3-year lock-in period. So, to claim the tax benefit, you have to stay invested for at least 3 years.
• International Funds: These are Indian mutual funds that invest in companies listed outside India, such as Google, Microsoft, Apple, Nvidia, etc. They give you exposure to international companies and markets.

Here’s how investing in equity-oriented funds can benefit you.

• Diversification: The biggest advantage of equity funds is that they give you access to a diversified portfolio without having to buy and manage every stock yourself. Your money is spread across multiple companies. The growth doesn’t depend on just one stock’s performance.
• Long-term growth: As the company, its business, the sector, the economy, and broader markets grow over the years, your investment grows with them. There is no guaranteed return, but equity is generally used when the goal is long-term capital appreciation.
• Start with a small amount: You don’t need lakhs sitting in your bank account to start investing. You can start with as little as a ₹100 SIP per week or month, depending on the scheme. You can also step up your SIP and gradually invest more over time.
• Variety of options to choose from: You can select funds aligned with specific market opportunities. For example, if you want exposure to opportunities in the healthcare industry, you can opt for a pharma sectoral fund. Or if you want exposure to global giants like Google, Amazon and Apple, you can invest in international equity funds.

Since equity funds are directly linked to the stock market, they carry certain risks. Here are key risks you should know before investing:

• Volatility: Stock prices change every day, and based on that, your fund’s value will go through ups and downs.
• Category or sector risk: Certain funds are naturally riskier than others. For example, a small-cap fund or a specific sectoral fund (like banking or IT) can fluctuate more sharply than a large-cap fund.
• No guaranteed returns: Unlike FDs, equity mutual funds don’t offer fixed or guaranteed returns. In the short term, you may also see a negative return on your mutual fund investment.

How can you manage these risks?

• Invest for 5+ years: A longer time horizon will smooth out the effect of short-term market swings.
• Use SIPs to invest: Investing daily, weekly or monthly helps you average out purchase cost.
• Diversify: Invest in different schemes like flexi-cap or hybrid funds to reduce overall risk.

Along with equity funds, there are 3 more categories of mutual funds: debt funds, hybrid funds, and index funds. Let’s have a quick look at what these funds invest in, their purpose and what role they can play in your portfolio.

Here are a few things to keep in mind while selecting the best equity mutual funds to invest in:

• Understand the category: Know whether you’re looking to invest in a large-cap fund, mid-cap fund, small-cap fund, flexi-cap fund, sectoral fund or another type of equity fund.
• Check investment objective: Yours and the fund’s objective should align. For example, if you’re saving for higher education after 5-7 years, large-cap or flexi-cap funds are better. If your goals are short-term, debt funds may be a better option.
• Look beyond past performance: A fund that has given good returns in the past doesn’t mean it will continue to give such returns in the future.
• Scan through the portfolio: See which stocks your money is actually going into and whether you’re comfortable with the exposure.
• Check the costs involved: High expense ratios and exit loads can affect your returns over time. Even a 1% difference in annual fees can have a big impact over 10-15 years of investment. Always compare fund costs before investing.
• Align with your time horizon: Don’t put short-term money into volatile funds like small-cap funds just because they look attractive. Use equity funds for long-term growth, and consider options like liquid funds for ultra-short-term needs.

Remember, a trending reel about best equity funds doesn’t automatically mean they are the right choice for you. Always check whether the fund you are considering matches your financial goals, risk appetite, and investment horizon.

Starting with equity funds on Millions is a simple process:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Enter a few details to open a free account. Complete your KYC.
• Log in and search for curated mutual funds based on your requirements.
• Select an equity fund that fits your goal and investment approach.
• If you want to invest through SIP, choose your preferred frequency, such as daily, weekly, or monthly.
• Enter the amount you want to start investing, choose a SIP date, and complete the payment.

That’s all. You don’t need a large amount to start. Invest a small amount and understand what you’re buying. Gradually increase your SIP amount as you start earning.