Mutual funds are a modern investment vehicle ideal for investors who wish to follow an aggressive investment strategy. Most mutual funds are famous for carrying high risks rewards ratio. Financial advisors generally recommend investors to understand their risk appetite before investing in market linked schemes like mutual funds themselves. Mutual fund investments are exposed to market volatility and hence they do not guarantee returns.
Market regulator SEBI (Securities and Exchange Board of India) describes mutual fund as – “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced”.
SEBI has further categorized mutual fund schemes based on its unique attributes like investment objective, asset allocation strategy, risk profile etc. The purpose behind this categorization is to bring similar schemes under one umbrella. This way it is easier even for potential investors to make an informed investment decision.
Mutual funds schemes like equity schemes are largely categorized as small cap, mid cap, large cap and multi cap schemes.
Large cap mutual funds: As per SEBI definition a large cap fund is “An open ended equity scheme predominantly investing in large cap stocks”. Large cap funds are those open ended mutual funds that predominantly invest in stocks of companies that have large market capitalization. These funds majorly invest in stocks of those companies which are financially stable. Of the total assets, large cap funds invest a minimum of 80 percent in company stocks and other equity related instruments of companies having a large market cap.
Mid cap mutual funds: As per definition by SEBI, mid cap funds are “open ended equity scheme predominantly investing in mid cap stocks”. Mid cap mutual funds invest a minimum of 65percent in equity and equity related instruments of midcap companies.
Small cap mutual funds: SEBI defines small cap funds as “An open ended equity scheme predominantly investing in small cap stocks “. Small cap mutual funds are equity mutual funds where of its total assets, a minimum of 65 percent is invested in equity and equity related instruments of small cap companies.
Multi cap funds: Multi cap funds are mutual fund schemes that aim at generating income by investing instocks of companies with all market capitalization.
Similarities and differences between multi cap funds and large cap funds
|Parameter||Large Cap||Multi Cap|
|Income generation||By investing in bluechip stocks of financially well established companies||By investing in small cap, mid cap and large cap company stock|
|Risk profile||Less risky as they invest in financially secured and stable company stocks||Highly volatile to market movements and hence investors with high risk appetite should consider investing|
|Ideal for||Investors who wish to generate income over the long term by investing in a portfolio of less risky company stocks||Investors with a high risk appetite who wish to invest in a diversified portfolio small, large and mid cap securities.|
Are multi cap funds better than large cap schemes?
Now that you know the similarities and differences between multi cap and large cap funds, you may have realize that both these mutual fund schemes have their own shares of pros and cons. Depending on your investment objective, risk appetite and investment horizon, investors should determine which fund is better for them. One good thing about both these investment schemes is that they have the option of SIP investment. Systematic Investment Plan gives investors an opportunity to invest small amounts at regular intervals and might help them achieve their life’s ultimate financial goal.