Based on the characteristics of portfolio companies, many types of equity funds exist. Some are based on the market capitalization of the underlying stocks, while others are sectoral equity funds with a distinct investment strategy.
We’ll look at the differences between multi-cap and Focused equity funds in this article. Both of these funds can invest in funds with a variety of market capitalizations, but there are some major differences between them.
What is Multi-Cap Equity Fund?
Multi-Cap Funds invest their assets in a portfolio of equities and equity-related stocks of companies with diverse market capitalizations, as the name implies. Large-cap, small-cap, and mid-cap enterprises are all represented in a Multi-Cap Fund. The Multi-Cap Fund category is a suitable alternative to meet your risk tolerance because each scheme invests in different quantities.
Multi-cap equity funds invest in companies with a wide range of market capitalizations. Multi-cap equity funds engage in businesses of all sizes and a variety of industries. Unlike large or mid-cap funds, they have control over how money is distributed among large, mid-sized, and small businesses. This adaptability also enables them to make portfolio adjustments as market conditions change.
The portfolio definition limits the fund managers whether you invest in a large, small, or mid-cap fund. This means that even if the opportunity is good, a fund manager of a large-cap fund cannot invest in shares of a small-cap company. As a result, a multi-cap fund is thought to be a better option for wealth building because the fund managers can take advantage of investing opportunities.
Types of Multi-Cap Equity Funds
Multi-cap funds can be broadly grouped into the following types, notwithstanding the lack of precise names:
- Multi-cap funds that specialize in large-cap equities — These funds invest primarily in large-cap stocks and then look for possibilities in the mid cap and small-cap segments.
- Multi-cap funds that focus on small/mid-cap stocks – These funds actively seek out investment possibilities in the small/mid-cap segments, with large-cap stocks being used mainly to hedge against potential losses.
- There is no specific focus on market capitalization- With a clear focus on selecting stocks that can outperform, these schemes hunt for investment possibilities across market capitalizations.
What are the Merits of investing in Multi-Cap Mutual Funds?
Multi-cap funds provide a diversified portfolio by investing in firms of various sizes and sectors. This method of diversification reduces your risk. This is because different sectors or areas of the market can perform differently at any one time, and spreading investments across several sectors keeps risk under control.
You receive exposure to all of the main industries and firms within them that are driving the Indian economy ahead because these funds don’t limit themselves to a single market cap or industry. What this means is that you will not miss any opportunities in the Indian market.
The ability to choose the mix of large, mid, and small-cap stocks allows these funds to adjust their portfolio composition to match market conditions. For example, if mid-cap and small-cap companies become overvalued and it appears that the market is headed for a bubble, the fund manager can switch to large-cap stocks and adopt a defensive position.
What is Focused Equity Funds?
Focused Equity funds are a type of mutual fund that invests in a limited selection of stocks. Instead of a varied mix of different equity positions, the funds are concentrated on a limited variety from only a few sectors with this investing program.
According to the Securities and Exchange Board of India’s standards, these funds can invest in a maximum of 30 equities (SEBI). These funds, such as Multi-cap mutual funds, can invest in any market segment, including large cap, mid-cap, small-cap, and so on.
Due to their objective of purchasing stocks from a small number of companies, these funds are also known as “best idea funds.” The main goal of these funds is to generate the highest possible returns by investing in high-performing assets.
Advantages of Investing in Focused Equity Funds
Investors might benefit from a more focused approach to stock selection by investing in targeted funds. It reduces the danger of over-diversification in a portfolio of investments. When a fund invests in a large number of equities, it’s possible that not all of the securities perform at the same time.
While a fund manager in another category may choose to limit the number of portfolio stocks, concentrated funds do so as a matter of investment philosophy. Tracking the investment portfolio becomes considerably easier when the number of stocks in the portfolio is reduced.
Furthermore, the portfolio stocks are chosen after thorough research and analysis, with the goal of reducing the number of stocks in the portfolio. As a result, fund managers pay close attention to the stocks’ growth prospects in order to provide better returns to investors.
Difference between Multi-Cap Equity Funds and Focused Equity Funds
| Features | Multi-cap Equity Funds | Focused Equity Funds |
| Danger | Diversification makes them less hazardous than concentrated equity funds. | Multi-cap equity mutual funds, which invest in a variety of stocks, are riskier. |
| The asset classes in which the Funds invest are as follows: | Multi-cap funds should arrange their investments by company size as follows, according to SEBI guidelines:
– A large cap is set at a minimum of 25%.
– Mid-cap: a minimum of 25%
– small-cap: a minimum of 25% |
Can invest in up to 30 equities from a variety of companies of various sizes. |
| Potential for expansion | They have a lower growth potential than concentrated stock funds. | If the majority of the fund’s stocks perform well, the fund’s growth potential is increased. |
| Sectors | Invest in a variety of businesses. | Invest in a few different industries. |
| The Expertise of the fund manager | Similar to traditional mutual funds, where the fund manager must diversify risk by selecting companies of diverse sizes with great growth potential. | Greater emphasis on the fund manager’s ability to select the 30 best stocks with the best return potential. |
| Topic | Less inclined to concentrate on a single topic | It’s possible to focus on a single subject, such as “avoid PSU stocks.” |
