Equity mutual funds allow all kinds of investors to put their money into different types of asset classes, be it a newbie or an expert. Having said that, depending on one’s age, financial goals, risk-taking ability, and expectations, one can choose to invest in large-cap, mid-cap, multi-cap, or small-cap equity funds.
The different types of funds indicate the size of the companies in which the funds are invested in. For instance, a large-cap fund has around a minimum of 80 per cent of total assets invested in equity securities of large-cap companies, a mid-cap fund at least 65 per cent invested in equities of mid-cap companies, whereas a small-cap fund around 65 per cent of total assets invested in equities of small-cap companies.
Small-cap and mid-cap funds
This kind of fund works best for young investors who have high return expectations along with a high-risk appetite. Industry experts say, good rated small and mid-cap funds could be rewarding for investors assuming he/she has a long investment tenure.
These funds allow getting high returns if one is willing to take high investment risks. Having a longer investment period also lowers the risk associated with small and mid-cap funds. Having said that, experts suggest investment diversification is crucial, and investors should always diversify their investments across different asset classes or within the same asset class but across different mutual fund companies.
With this kind of funds, the minimum allocation to equity needs to be 75 per cent of the corpus, out of which a minimum allocation of 25 per cent each in large, mid, and small-cap equity securities, is invested. Experts say if one is looking to invest in equity funds but does not want to take high-risk exposure, they could consider investing in good-rated multi-cap funds. These multi-cap funds are ideal for both young and middle-aged investors. Note that, comparatively multi-cap funds offer lower returns than small and mid-cap funds.
Investors in the mid-age group who are looking for higher returns than debt funds without taking high investment risk could go for large-cap funds. These funds are also known to offer stable returns in a volatile market.
As compared to funds with higher exposure to mid and small-cap equities, experts say large-cap funds generally carry lower risk and provide moderate returns. Hence, if one is close to retirement, or has low-risk tolerance, etc. could look at good rated large-cap funds among other equity mutual fund products.
Lastly, financial experts say the selection of any investment product should be strictly based on one’s financial goals. Hence, if one’s financial goals are long-term and they have a high-risk appetite, he/she could opt for higher equity allocation in small and mid-cap funds. However, if one’s financial goals are for mid to long-term with a moderate risk appetite, experts say he/she could allocate a greater portion in multi-cap funds.
For moderate to low-risk appetite individuals, with medium-term financial goals, experts suggest investing a major portion of their equity allocation in large-cap funds would be ideal. Additionally, one should also shift their allocation from small/mid-cap to multi-cap and large-cap with age, and change in risk appetite.