A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What is the difference between Multi Cap and Flexi Cap funds?
If you have wondered what multi cap and flexi cap funds are, you can refer to the SEBI product categorization circular issued in October 2017 which came into force in June 2018. This circular allowed multicap funds to invest 65% of their assets in equities and equity-related instruments on large, mid-cap and small-cap stocks. In September 2020, SEBI mandated multicap funds to maintain an exposure of at least 25% each in large, mid-cap and small-cap stocks with the aim of providing greater diversification to multicap fund investors. However, this limits the fund’s ability to take advantage of opportunities based on its prospects because sometimes it may be necessary to underweight a particular segment that is expected to hurt, which would mean breaching the minimum allocation mandate of 25%.
Then in November 2020, SEBI introduced Flexi Cap funds which are similar to Multi Cap funds but follow a flexible investment mandate. The key difference between multicap and flexicap fund is the flexibility the latter has in changing the allocation between large limits, medium and small limits, while ensuring that 65% of its assets are allocated to equity and equity instruments. For example, if the fund manager feels the need to reduce exposure to small caps during economic uncertainty, they can reduce the allocation to zero and increase the allocation to large caps/mid caps. But a multi-cap fund cannot manage its portfolio so dynamically.
Investors who find comfort in staying invested in all market capitalizations regardless of market cycles with a fixed allocation to small, mid-cap and large-cap companies can choose multi-cap funds. Those who prefer a flexible investment strategy that can increase/decrease exposure between markets depending on market prospects can opt for Flexi cap funds.