Equity investments are a proven method of corpus building, especially over a longer period of time. But different investors have different risk appetites, and different types of equity investments could be best suited for them. Classification is one thing that helps you find the fit for you. Classification based on market capitalisation is one of the most used here.
Flexi-cap and multi-cap funds are two fund categories that focus on investing in companies of different market capitalisations. Let us take a deeper look at market capitalisation and understand the differences between a multi-cap and Flexi-cap mutual fund.
What is market capitalisation?
Market capitalisation, commonly known as market cap, is the total value of the company’s outstanding shares. This can be calculated by multiplying the total number of shares with the price of a share.
Market cap can be used to gauge how big a company is monetary-wise. A bigger market cap means a larger, fundamentally strong company, while a smaller cap group has companies yet to be established and are on their growing stage.
Large-cap companies
Large-cap companies have the most significant market caps. They are companies that have existed for some time now and mostly have stable fundamentals. This means that sudden market movements may only have a lesser effect on them. Also, since these companies have already achieved their growth, you may not see significant short-term growth as well.
Hence, investing in large-cap companies may be a wise option for risk-averse investors.
Mid-cap companies
They are also large companies, but not as large as large-cap ones market cap-wise. They tend to have characteristics that are a mix of both large-cap and small-cap companies. They may not have growth potential as much as some small-cap companies, but they have stronger fundamentals.
Hence, investing in mid-cap companies might be suitable for investors looking for a balanced option.
Small-cap companies
They are at the bottom of the list of companies. They are yet to achieve big, most of them in aggressive growth stages. Hence, there is a chance for you to earn higher profits by investing in them, but there is a higher risk involved as well.
You can invest in stocks of different market caps in two ways – through multi-cap and Flexi-cap funds. Let us see what they are and how they differ.
Multi-cap vs Flexi-cap
The fundamentals of the funds are the same, but the rules governing them and how they work differ. According to the latest mandates by the Securities and Exchanges Commission of India (SEBI), multi-cap mutual funds should have at least 65% of their portfolio reserved for equities. Also, each large, mid and small-category should have at least 25% space.
That means, if we take a multi-cap fund, it will invest 25% of your money in large, mid, and small-cap categories each. This could give you more considerable equity exposure and greater diversification.
At the same time, Flexi-cap fund managers have more liberty when it comes to choosing the amount of diversification in the fund. This allows them to design a portfolio more according to their expertise.
The choice between multi and Flexi-cap funds should be based on your investment preferences. For instance, if you are looking for more considerable diversification and equity exposure, you could choose a multi-cap fund. At the same time, if you want to get the most out of the fund manager’s expertise, Flexi-cap may suit you better.
A decision on where to invest should be made after thoroughly understanding your risk appetite and investment goals. Here, too, make sure you do needful for the best results.
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