Short answer: An equity fund pools money from many investors and has professional fund managers buy shares of listed companies, which are companies whose shares trade on a stock exchange. Because its value follows the stock market, an equity fund can fall in the short term when the broader market declines. The sections below explain how the money is invested, how funds are classified, and what the costs and risks are.
Last reviewed: 11 November 2026
At a glance
| Term | What it means | Key point |
|---|---|---|
| Actively managed fund | The manager picks stocks through research | Results depend on the manager’s choices |
| Passive fund | Tracks a market index such as the Nifty 50 or Sensex | Holds the companies in the index |
| Large-cap fund | Holds companies with large market value | Generally considered more stable |
| Small-cap fund | Holds companies with small market value | Generally considered more volatile |
| Lump sum investment | One amount invested at a single point | Full amount exposed to the market from day one |
| SIP (Systematic Investment Plan) | A fixed amount invested at regular intervals | Money goes in over time, not all at once |
How does money move from investors into an equity fund?
When you invest in an equity fund, your money joins a common pool with money from many other investors. The fund manager uses this pool to buy shares of listed companies. Your share of the fund rises or falls with the combined value of those shares.
You can put money in as a lump sum, meaning one amount invested at a single point in time. You can also use a Systematic Investment Plan, or SIP, which invests a fixed amount at regular intervals, such as every month. With an SIP, the amount you invest is the same each time, regardless of whether the market is higher or lower on that date.
Why does spreading money across companies matter?
An equity fund spreads its money across many companies and sectors. A sector is a group of businesses in the same industry, such as banking or pharmaceuticals. Spreading the money lowers the impact of any single company or industry falling.
This spreading has a limit. It reduces the effect of one company’s trouble, but it does not protect the fund when the broader market declines. If most companies in the market fall together, a diversified fund can fall too.
What do large-cap, mid-cap, small-cap and multi-cap mean?
Equity funds may be classed by the market value of the companies they hold. Market value, also called market capitalisation, is the price of one share multiplied by the total number of shares a company has issued. A company with a large market value is a large-cap company.
Funds can be large-cap, mid-cap, small-cap, or multi-cap, where a multi-cap fund holds companies of different sizes. Large-cap funds are generally considered more stable, while small-cap funds are generally considered more volatile. Volatile means the value can swing up and down by larger amounts over a shorter period.
Is an actively managed fund different from an index fund?
Yes. In an actively managed fund, the manager picks stocks through research. In a passive fund, the fund tracks a market index. An index is a fixed list of selected companies, such as the Nifty 50 or the Sensex, and the fund holds the companies on that list.
The two approaches have different sources of results. An actively managed fund’s returns depend on the manager’s choices, which can differ from the index. A passive fund’s returns follow the index more closely, before costs.
How do expense ratios reduce returns?
Equity funds charge an annual expense ratio, which is a percentage of the fund’s value that covers operating costs. The charge is deducted from the fund, so a higher expense ratio reduces the investor’s overall returns.
Hypothetical example, using invented figures for illustration only: Suppose you invest ₹1,00,000 in a fund that earns 10% in a year before costs, which is ₹10,000. At a 1% expense ratio, the annual charge is ₹1,000, leaving a gain of ₹9,000. At a 2% expense ratio, the charge is ₹2,000, leaving a gain of ₹8,000. The gap is small in one year, but it repeats every year the fund is held.
What are the main risks?
The main risk is that the stock market declines. Because the fund’s value follows the market, your investment can be worth less than you put in, especially over the short term. The fund does not promise a fixed amount back.
Concentration in smaller companies adds another risk. Small-cap funds are generally considered more volatile, so their value may move more sharply than a large-cap fund’s value in the same period.
Hypothetical example, with invented figures: If ₹1,00,000 invested in a fund falls 20% in a year, its value becomes ₹80,000. A 20% fall needs a 25% gain to return to ₹1,00,000, so the loss is not simply reversed by an equal percentage rise.
Frequently asked questions
Can an equity fund lose money?
Yes. Equity fund returns are tied to stock market performance, so they can fall in the short term when the broader market declines.
Is a SIP the same as a lump sum investment?
No. A SIP invests a fixed amount at regular intervals, while a lump sum is a single amount invested at one point in time.
Why does the expense ratio matter?
The expense ratio is the annual charge that covers a fund’s operating costs. A higher expense ratio reduces the investor’s overall returns.
What is the difference between actively managed and passive equity funds?
An actively managed fund’s manager picks stocks through research, while a passive fund tracks a market index such as the Nifty 50 or Sensex.
Sources and last check
Facts in this article were checked against the sources below on 11 November 2026. Rules and figures can change; check the primary source before acting.
- kotakneo.com (broker education)
- upstox.com (broker education)
- icicidirect.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.