7 MinsJan 11, 2022
We all know the perils of Inflation and that how important it is to consider real returns over nominal returns (Real Returns = Nominal returns – Inflation). Rising price levels in other words, “Inflation”, diminishes the value
of money with time and therefore, beating inflation with your investments becomes essential.
Equity-oriented mutual funds could be an important part of your portfolio, if you are looking to build wealth for the long term. They help in beating inflation and can help you achieve your goals provided you are ready to assume some risk and
earn market-linked returns.
Within the equity-oriented category, there are various sub-categories of mutual funds.
Amongst them are Multi-cap and Flexi-cap Funds. While both sub-categories of funds invest in companies across market-cap, the manner in which they can invest
are different. Let us understand in detail.
Features of Multi-cap Fund
- As the name suggests, this equity-oriented fund has the mandate to hold a diversified portfolio across large, mid-cap, and small-cap companies.
- As per regulation, a Multi-cap Fund has to invest at least 75% of its total assets in equities, in the following manner:
- 1. Minimum 25% in large-cap companies
- 2. Minimum 25% in mid-cap companies
- 3. Minimum 25% in small-cap companies
- A Multi-cap Fund is required to maintain the equity allocation regardless of the market conditions. So, you get the best of both worlds ––the stability of large-caps and the high-return potential of mid-cap and small-caps.
- The fund manager does not have much flexibility to swing allocation to one particular market capitalisation segment
- But if the large-cap portfolio is in good shape, it may offer some stability. Most Multi-cap Funds usually tilt their equity portfolio to large-caps and hold the rest in mid-cap and small-cap companies.
Also Read: [Make the most of your bonus, gifts with mutual funds]
Features of Flexi-cap Fund
- Flexi-Cap Fund is an open-ended, dynamic equity scheme. It invests across companies of any market capitalizations. That is, large-caps, mid-caps, and small-caps companies.
- A Flexi-cap Fund has to invest a minimum of 65% of its assets in equity and equity-related instruments.
- Unlike Multi-cap funds, there are no minimum threshold for investments in Large, Mid and Small cap, the exposure can be managed dynamically.
- A Flexi-cap Fund provides its fund manager better flexibility to explore investment opportunities across large-cap, mid-cap, and small-cap stocks, by pursuing both value and growth.
- Study the portfolio characteristics of the scheme to assess how it has diversified the portfolio across market-caps, the top-10 constituents of the portfolio, and top-5 sector exposure.
- If the portfolio is not appropriately diversified and the quality of its holdings is poor, the scheme could expose your investment to high risk.
- Check the fund’s past performance, while past returns are not an indication of future returns, they may provide you with a better understanding of the fund.
- The risk-return trade-off should be compelling enough for you to invest.
To select a mutual fund suitable for you, click here.
Why you should invest in these funds
- Both these sub-categories of equity mutual funds are suitable for investors who have an investment time horizon of at least 5 years and who have the stomach for high risk in the endeavour to generate wealth.
- Whichever type of mutual fund scheme you choose, make sure it is in line with your risk profile, investment objectives, the financial goals you wish to address, and the time in hand to achieve those envisioned financial goals.
- Lastly, if the scheme selection suits your requirements, you may invest a lump sum and/or take the Systematic Investment Plan (SIP) route. When the equity markets are expected to be volatile, SIPs would mitigate the risk with its integral
rupee-cost averaging feature and compound your wealth over the long term so that you can fulfil your envisioned financial goals.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision