With mutual fund investment on the rise, this has become the go-to investment channel. However, within the category of mutual funds, investors are able to choose a fund to invest in with multi-cap funds and flexi cap funds, depending on their requirements.
If you are one of those investors who goes ahead to open a demat account today to invest in stocks, and then listens to a friendly ear to make your investment, you are not going about investment decisions in an informed manner. You may be swayed by friends and family (or media advertisements) to opt for mutual funds of a certain type, like multi-cap funds, for instance. However, these may not be right for you. Every investor has a different financial goal, means to invest and risk potential. Hence, you have to educate yourself from good sources to know what different funds are all about before you invest.
Doing your homework to fully grasp the details of any fund you invest in is just like the research you would undertake of a company if you invested in any upcoming IPO. Within the purview of mutual fund investment, you have the option of investing in funds which are multi-cap funds and flexi-cap funds. Nonetheless, before you think one is better than the other, you have to know what they are. Let’s look at multi-cap funds first. Multi-cap funds are essentially composed of stocks of companies with different levels of market capitalizations, like a combination of large-cap, small-cap and medium-cap companies. These are invested in equal amounts in any mutual fund.
For whom are multi-cap funds ideal? If you are an investor with a long-term investment horizon, and wish to invest to maximise your returns to the fullest extent, these are good. Such funds should ideally be held for periods of five years or more for rewarding returns. This is also the kind of investment which mitigates risk as you get a bucket of different kinds of stock. An additional plus is portfolio diversification.
Flexi-cap funds offer you more portfolio diversification in investment. They invest primarily in stocks with different market capitalizations, but also invest in various industry and sector stocks. With a flexi-cap fund, mutual fund managers rebalance the fund every now and then, to get the best returns according to market fluctuations. In flexi-cap funds, investment is diversified across sectors. With fund balancing, there is some assurance of solid yield from stocks of companies that have good prospects. Another advantage of these funds is that there are no fixed allocations of stocks to the fund, in terms of percentages, whereas this is fixed in multi-cap funds. Flexi-cap funds allocate wealth more diversely, and while this can mitigate risks, it can increase them too. Nonetheless, when you do receive returns, they are plentiful. In flexi-cap funds, fund managers are totally in control of fund rebalancing, whereas this is not the case in multi-cap funds.
Now that you have understood what each kind of fund entails, you can make informed decisions based on your own requirements. There is no one type which is better than the other - it all depends on your needs as an investor. There may be said to be less risk in flexi-caps as they invest more in robust large-cap stocks. However, markets turn and investors must be prepared for this right from the time they open a demat account. While you consider mutual funds, you may want to view some solid upcoming IPO investment as well.
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