Of the different types of mutual funds, equity funds are the variant of mutual funds which is known for offering higher returns. As the name suggests, this mutual fund scheme is known for directing investments towards equities. Since they allocate funds to the equity market, it is also important to make note of the fact that these mutual funds come with a high degree of risk. If the market and company you invested in perform well, this mutual fund scheme worked for you. However, in case the market is going through a bear phase, or the company is not performing very well, you will be facing losses. So, before signing up for an equity mutual fund, it is imperative on your part to assess your risk appetite.
Another thing to note about equity mutual funds is that just like mutual funds, even they come with different variants. Each of these variants has different levels of risk. Apart from risks, these variants are known for allocating funds to different market capitalisations. Some of the prominent examples of different types of mutual funds are flexi-cap equity funds and multi-cap equity funds.
Multi-cap equity funds:
Multi-cap mutual fund schemes are known for being the type of equity mutual funds that invest in the stocks of businesses belonging to different market capitalisations. They usually invest approximately 75% of their total assets in the stocks belonging to businesses that come with different market capitalisations. Moreover, multi-cap equity mutual funds have to invest at least 25% of their funds across mid-, large-, and small-cap stocks. The proportion in which the fund manager invests in the different companies belonging to different market capitalisations is dependent on the investment objective.
Are there any benefits associated with multi-cap equity funds?
- Funds are diversified easily:
In accordance with the name ‘multi-cap funds’, these funds are known for investing in stocks of businesses falling under different market capitalisations. In firm contrast to equity mutual funds with a market cap focus, such as large-, mid-, or small-cap funds, multi-cap funds offer fund managers the freedom and flexibility to invest in companies of not one, but different market caps. This feature gives you funds exposure to diverse stocks.
- They mitigate risks effectively:
As multi-cap funds allocate funds to stocks of companies that are of different sizes and sectors, they are known for offering effective risk diversification. It is possible for fund managers to change the allocation of funds among the businesses after studying the prevailing market conditions. These mutual fund schemes are a good investment option for investors that have medium risk tolerance.
- Fund managers are responsible for the upkeep of these funds:
Mutual fund investors in general require a certain level of skill and time. However, if you don’t have that, you could enjoy the services of fund managers. The choice of fund managers is known for either making or breaking the performance of multi-cap funds. It is possible for you to benefit from the fund manager’s experience in the world of investment. Also, you don’t need to worry about monitoring the market conditions. That’s because the fund manager will be responsible for readjusting the portfolio according to the market conditions.
Similar to multi-cap funds, flexi-cap funds are a type of equity fund that allocate funds to businesses that are a part of not one, but a wide range of market capitalisations. Apart from that, flexi-cap funds are different from multi-cap funds in one major way. In multi-cap funds, it is imperative for a fund manager needs to follow the 25-25-25 rule while investing in the equity fund. There is no such rule in flexi-cap funds. So, flexi-cap funds diversify your investment across businesses that belong to different market capitalisations that too without any sort of restrictions.
What benefits are associated with flexi-cap funds?
- Flexi-cap funds are a relatively safer investment option than mid- and small-cap funds:
Flexi-cap funds are known for providing your money with high exposure to large-cap stocks. This feature is known for safeguarding your mutual fund portfolio from the volatility that is associated with the equity market. Exposure to large-cap stocks results in risk-adjusted returns that are higher than those offered by mid- and small-cap funds.
- Multiple investment styles are followed:
Another feature of this variant of equity mutual fund is that it is known for combining different investment styles. Numerous styles of investments are mixed with the aim of maximising investment returns. For instance, the style referred to as value investing is known for focusing on undervalued stocks. Another style called growth investing allocate funds to growth opportunities.
Is investing in both a sensible approach?
Simply put, no. That’s because both flexi- and multi-cap funds are two different variants of equity funds. That’s because equity funds in general are high-risk investments. So, determine whether you want to sign up for a scheme that invests in different market capitalisations but with some limitations or the scheme that allocates funds to different market capitalisations without any limitations.