Choosing the right mutual fund category is often one of the biggest challenges for first-time investors. While many understand the importance of starting early and staying invested for the long term, deciding where to invest can be confusing, especially when several fund categories appear to offer similar benefits.
One such query was raised by Himanshu Khanna, a 37-year-old investor and a viewer of The Money Show on ETNow, who plans to invest Rs 1,000 every month through a SIP for the next 20 years. His question was straightforward: should he invest in a multicap fund or a flexicap fund?
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Responding to the query on ET Now, Samir Shah, Founder, Investa Financial, explained the key differences between the two categories and how investors should approach the decision based on their risk appetite and investment preferences.
Multicap vs flexicap funds
According to Shah, many investors struggle to differentiate between multicap and flexicap funds, despite the two categories operating under very different investment mandates.
Multicap funds are governed by stricter regulations. Under Sebi norms, these funds must allocate a minimum of 25% each to large-cap, mid-cap and small-cap stocks. This means at least 75% of the portfolio remains fixed across the three market-cap segments, regardless of prevailing market conditions.
"The fund manager has to follow the allocation rules prescribed by Sebi and has limited flexibility to alter exposure based on market conditions," Shah said.
Flexicap funds, on the other hand, offer fund managers complete freedom to allocate money across large-cap, mid-cap and small-cap stocks as they deem appropriate. "If markets become volatile, a flexicap fund manager can increase exposure to large-cap stocks and move 70-80% of the portfolio into that segment. Similarly, when opportunities emerge in mid-caps or small-caps, the allocation can be increased accordingly," he explained.
Which one to choose?
Shah believes the choice ultimately depends on an investor's risk tolerance. Investors who are comfortable with higher volatility and temporary fluctuations in portfolio value may consider multicap funds. Mandatory exposure to mid-cap and small-cap stocks may enhance long-term returns, although it may also increase risk.
"If you don't mind seeing your portfolio move up and down and are willing to take slightly more risk for potentially higher returns, then a multicap fund can be considered," Shah said.
Shah suggested that investors seeking a smoother investment experience and greater flexibility from the fund manager may find flexicap funds more suitable. "If you prefer peace of mind and want the fund manager to dynamically manage allocations depending on market conditions, then a flexicap fund may be the better option," he added.
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Started too late?
One concern often raised by investors who begin investing in their late thirties is whether they have missed out on crucial years of wealth creation. Shah dismissed that concern in Himanshu's case.
"He has clearly stated that he wants to invest for 20 years. That is a sufficiently long investment horizon. He still has enough time to benefit from the power of compounding," he said.
For investors with such a long time horizon, equity-oriented mutual funds can continue to play a meaningful role in wealth creation, provided they remain disciplined and stay invested through market cycles.
Investing should be goal-based
While selecting the right fund category is important, Shah stressed that it should not be the starting point of financial planning. Instead, investors should first identify the purpose behind their investments.
"Rather than starting with the question of whether to invest Rs 1,000 or Rs 2,000, investors should first define their financial goals," he said.
According to Shah, every investor should answer three key questions. Firstly, what is the goal for which the investment is being made? Secondly, how much money will be required to achieve that goal and lastly, how much time is available before the goal needs to be met?
Once these questions are answered, investors can determine the required investment amount and choose suitable investment products.
Allocation of investments
Although Shah noted that detailed financial planning would require additional information about an investor's existing assets and liabilities, he shared a broad asset allocation framework for someone in Himanshu's age group.
"Looking at his age, around 65% of the overall portfolio can be allocated to equity and 35% to debt," he suggested. Such a mix can provide a balance between long-term growth and portfolio stability while allowing investors to benefit from equity markets over the coming decades.
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For investors confused between multicap and flexicap funds, the choice largely comes down to risk appetite. Multicap funds may suit those willing to tolerate higher volatility in pursuit of potentially better returns, while flexicap funds may appeal to investors who prefer the flexibility and tactical allocation decisions offered by fund managers.
However, Shah believes the bigger priority is not choosing between the two categories but building a goal-oriented investment plan. With a 20-year horizon, disciplined investing and a well-defined financial objective, even a modest monthly SIP can become a meaningful wealth-creation tool over time.
( Disclaimer : Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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