India’s economy is the biggest in the world, and while many factors affect its growth, a few are essential, and one of them is capital formation. Capital formation, or the process that generates new capital available for economic activity, is one of the financial system’s primary goals. India is less developed economically and has a low level of capital formation when compared to developed countries. This study examines the relationship between investor satisfaction and the various types of equity funds small-, mid-, large, and sector funds with a particular emphasis on the mediating function of financial literacy. The study’s objectives were to determine whether financial literacy plays a crucial role in strengthening the relationship between investor satisfaction and fund categories. This study uses a quantitative approach and surveys investors with a variety of demographic and professional backgrounds. It is anticipated that the results will show the way financial literacy improves investors’ decision-making and level of satisfaction with their equity fund investments. The study adds to the expanding corpus of research on financial management and investment behaviour by emphasising the significance of financial literacy as a major factor in investor satisfaction and improved investment results. There is a discussion of the implications for financial advisors, legislators, and academic institutions to promote wise investment practices.