You must be very careful when investing in mutual funds. Always invest based on risk profile. If you are an aggressive investor, you choose investments which give high returns at high risk. A conservative investor chooses an investment, which gives lower returns at lesser risk.
Large-cap funds are mutual funds which invest primarily in companies which have a large market capitalization. Investment in the large-cap funds is considered to be safe, as these companies enjoy steady growth and profits over a long period of time. You can invest in large-cap equity funds, if you are looking for long-term capital appreciation. Mid-cap and small-cap funds may give higher returns than large-cap funds, but are quite risky.
Mid-cap funds are mutual funds which invest in mid-sized companies in terms of market capitalization. Mid-cap funds have a potential of giving higher returns than large-cap funds. These funds give higher returns during the bull market phase and fall heavily when the stock market crashes. You must invest in mid-caps only if, you are ready to take risk. But, make sure you do not have your entire investment in midcap funds.
Small-cap funds are mutual funds which invest primarily in companies, which have small market capitalization. Growth potential and risk associated with these funds are higher than the large-cap and mid-cap funds. These funds perform well when compared to other fund categories during a bull market and fall heavily during a crashing market.
Sector funds are restricted to a particular sector such as pharmaceutical, banking, FMCG, infrastructure and Information technology (IT). For instance: Pharma funds invest only in stocks of pharmaceutical companies. As the fund managers of these funds can't invest beyond their sectors, the performance of these funds will be based on the performance of the sector itself.
Diversified equity mutual funds are free to invest in any type of companies, irrespective of their industry segments and market capitalization. Some of these funds also invest in debt and money market instruments. The risk involved in these funds is less when compared to other equity fund categories, as these funds are well-diversified.