There is no perfect equation for success in stock markets. It can be a very unpredictable place, and what guides us is often what worked in the past. If history is believed like that, experts say that diversification is often the key. A well-balanced portfolio could help you appreciate your capital while keeping it safe at the same time. Muti and flex caps are two mutual funds categories that can help you create a diversified portfolio. Let us understand them in detail and determine which one is the better choice for you.
Both multi and flexi cap funds categorise the equities in their portfolio based on market capitalisation. Market cap is the total monetary value of a company based on the stock price and the total number of outstanding shares. SEBI’s guidelines help divide the companies into three broadly according to their market caps.
Companies with a market cap of more than Rs.20,000 crore comes under this category. They are stocks of companies that are huge and have a stable base. Therefore, these companies’ stocks tend to perform in stock markets with some stability. This is because they often have a predictable yet steady growth. But since these companies would have passed their growth stage, they tend not to show significant growth or decline. This makes investing in large-cap companies a safe bet.
They have a market cap of between Rs.5000 core and Rs.20,000 crore. These companies are on the way to attaining their stability and growth threshold. But unlike the above category, mid-cap companies tend to demonstrate a wide range of characteristics. For example, some of the companies on the list would be having stable growth, while some might be still trying to figure out their journey. This makes investing in mid-cap companies a bit riskier than investing in large-cap ones. But, on the other hand, the growth potential is higher with mid-cap companies too.
These companies have a market cap of less than Rs.5000 crore. Compared to the other categories, the list small-cap companies is vast. These companies might be still figuring their way out and could give your aggressive investment growth. But do keep in mind that there is a risk parallel to the growth potential. Since the number of companies is higher, you need to be extremely picky as well when you invest in them.
Mutual funds for diversification
As you have read above, their risk and potential return contrast and an expert’s help is often required. Mutual funds can help you with this. They have portfolios created by experienced fund managers. If your choice is mutual funds, there are two options for you to choose from – multi-cap funds and flexi cap funds.
As the name suggests, their portfolios represent the equities of different market cap companies. This can ensure that both growth and preservation of your capital are at focus. Of course, different multi-cap funds have different goals as well. For instance, an aggressive fund would invest more in small-cap companies, while a conservative fund favours large-cap ones. You may choose a fund according to your investment horizon.
Flexi-cap funds are similar to multi-cap funds in principle, but they have more active management. The fund’s portfolio will keep changing according to the market conditions to stick to the fund’s goal.
The choice between multi and flexi cap funds should be solely based on your investment taste. For instance, a multi-cap fund’s portfolio remains stable, so you tend to have more control over where your money goes. At the same time, flexi cap offers an expert’s help. If you are confused between the two, it is wise to talk to your investment advisor before investing.