Nowadays, many investors have started investing in
equity mutual funds by way of SIP or lump sum. They invest in schemes as
recommended by their advisor, distributor, financial planner, friends,
relatives, media and few do their own research. Most of the investors
know in which schemes they have invested and are aware how mutual funds
works, but are not aware in what kind of companies (large cap, mid cap
or small cap) do mutual funds invest and how risky the investment is.
Let us understand what kind of Equity Mutual Funds are available in the
market, how much risk is attached to it and its suitability to you as an
investor.
Kinds of Equity Mutual Fund
Equity: Large Cap Fund
A Large Cap fund
invests approximately 80% of the assets (funds) in large cap companies.
Large cap companies have market capitalization more than $8 billion.
These companies have a well-established business and are generally
dominant in the industry. These companies have good historic track
record. The growth rate of these companies is usually constant. So, the
performance of the Large Cap funds is stable compared to other funds.
Investment in Large Cap fund is advisable for investor who has
investment horizon of 10 to 12 years for their goals like child’s
education or child’s marriage and is not willing to take much risk and
compromises on the return on his investment.
Equity: Large & Mid Cap Fund
A Large & Mid Cap fund invests approximately 60% to 80% of assets
(funds) in large-cap companies and the balance in mid cap companies. The
performance of these funds is similar to Large Cap funds but due to 20%
- 40% exposure to mid caps, you may earn bit higher returns
comparatively. So, if you are willing to take some risk than you can
consider investing 20% - 25% in Large & Mid Cap fund and balance in
Large Cap fund for investment horizon of 10 to 12 years.
Equity: Mid & Small Cap Fund
A Mid & Small Cap fund
invests approximately more than 60% of assets (funds) in mid and small
cap companies and the balance in large cap companies. Mid and small
companies have market capitalization less than $8 billion. These
companies are new in the industry, in early stage of their business.
They have lot of expansion and growth opportunities, so they have the
potential of earning super-normal profits and growth compared to large
caps. Investment in Mid & Small Cap funds can be fruitful when the
market conditions are good, because mid & small cap companies
generally outperform the large caps. But on the other hand, it can be a
poor investment option in times of market instability because the
companies in the portfolio suffer greatly during such times since they
are less stable and less established. Thus, investment in Mid &
Small Cap funds is advisable for aggressive investors who are willing to
take high risk to earn higher returns. It is advisable to have an
exposure to Mid & Small Cap funds of approximately 15% to 20% if
your investment horizon is more than 15 years for goals like child’s
marriage or retirement.
Equity: Multi Cap Fund
As the name says ‘Multi Cap Fund’ it is a combination of large, mid and
small cap companies. It invests approximately 40% to 60% of assets
(funds) in large-cap companies and the balance in mid and small cap
companies. The fund manager has the flexibility to invest in different
companies. Due to the combination of variety of companies in the
portfolio, the portfolio gets diversified. Thus diversification reduces
the risk of the overall portfolio and increases the return. Investment
in Multi Cap fund in suitable for investors who wish to take moderate
risk. It is advisable to invest in Multi Cap funds approximately 15% to
20% if your investment horizon is more than 12 years.
Equity: Sector Funds
A Sector Fund invests in companies of particular sector (for example FMCG, Banking,
Power, etc) as per the fund objective. The performance of these funds
depends on the performance of the respective sector. So it is not
advisable to invest in Sector Funds, since they are very risky and the
portfolio of these funds is not diversified.
Equity: Index Fund
An Index Fund
is fund, which tries to replicate a benchmark equity index like Sensex,
Nifty, etc. Since these funds mimic the benchmark, the returns are also
similar but are subject to tracking error. Investment in Index Fund is
advised for investors who follow buy and hold strategy and are not able
to review their portfolio periodically.
You need to have a diversified portfolio by investing in different
market cap funds, in order to reduce the overall risk of your mutual
fund portfolio. Apart from choosing the right mutual fund for you, you
must also review your portfolio periodically. You should invest in a mix
of different market caps of funds as per your risk-taking capacity,
investment time horizon and your financial goals. As it is said, ‘The
art is not in making money, but in keeping it’; so it is very important
to make informed investment and manage your portfolio efficiently.
Published in: Moneycontrol.com The Tribune
