Mutual funds are an ideal option for novice retail investors to get their hands on the stocks of growing companies without risking their money too much. Handled by a professional fund manager, the money is invested in a portfolio that is aimed at giving maximum benefits to the investors.
Another thing that attracts investors to mutual funds is the amount of diversification it offers compared to directly investing in stocks. Multicap mutual funds and flexicap mutual funds are two equity-focused categories known for diversification. But how do they differ, and which one is more beneficial? Read on to find out.
Multicap mutual funds
According to the market size, companies in India are divided into three by the Securities and Exchanges Board of India (SEBI).
Large cap companies are well-established and have a significant market capitalisation.
Mid cap companies have a smaller market capitalisation than large-cap companies but are still significant.
Small cap companies have lesser market capitalisation than the other two categories.
Multicap funds have portfolios with shares of all three capitalisation groups giving you a diversified option. However, since the allocation options are focused on the companies’ shares, they tend to focus more on equities.
Flexicap mutual funds
Flexicap, too, is a mutual fund category that focuses on equities and diversification. Here, the fund is more dynamic, and it invests in shares of companies with no capitalisation bar. That means the portfolio could keep changing, and the ratio of shares from each capitalisation group may also vary according to stock market trends. Moreover, although a large part of the portfolio allocation is focused on equities, it can also have significant representation from other security classes.
Allocation of securities in multi and flexicap funds
As said above, the distribution of securities is different for both multip and flexi cap funds.
In the case of multicap funds, a certain percentage is reserved for shares of companies of different market capitalisations.
As per the regulation from SEBI, this is as follows,
- A minimum of 25% of the whole portfolio should be dedicated to shares of companies in large, mid, and small caps each.
This means that the percentage of equity in multicap funds is a minimum of 75%.
In the case of flexicap funds though, allocation is more dynamic. There is no minimum requirement for each capitalisation group, but rather, the equity ratio of the portfolio should be at least 65%.
Multicap vs flexicap – what to choose?
The choice here primarily boils down to what you want out of your investment. For instance, if you are a risk-averse investor who intends to explore stock markets through mutual funds, you may consider a flexicap fund as it is more dynamic and gives you more conservative options.
At the same time, if you are looking for a more straightforward and higher return option, a multicap fund where more of your money could be distributed to equities might become a better choice for you.
It is also imperative to assess and find your investment horizon before deciding on one. This can help you understand what your goals are out of your investment and how much risk you can handle.
Both multicap and flexicap funds give you the option to explore opportunities in the stock market through mutual funds. Talk to your investment advisor to figure out what would work for you better.