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Mutual funds can be broken up into different classifications. There are two main ways of categorizing funds: either by market capitalization or based on the types of assets the fund invests in.
Mutual funds are grouped into five categories according to the market capitalization of the portfolio companies: large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, and flexi-cap.
Large-cap stocks are the first 100 companies in an index. These large caps are listed on the Bombay Stock Exchange and National Stock Exchange, respectively.
As per SEBI guidelines, large-cap funds should invest at least 80% of their assets in equity and other equity-related investments. Some examples are convertible preference shares and convertible debentures.
The NIFTY mid-cap 100 index consists of the top 100 companies with moderate capitalisation, whereas the BSE mid-cap index lists just the top one hundred companies.Mid-cap companies offer higher growth potential but are riskier than large-caps. International regulations mandate that mid-cap mutual funds invest at least 65% of their assets in the equity and equities from other mid-cap companies.
Stock in small-cap companies start at 250th on the index (market capitalization). This includes the NIFTY Small Cap 100 and BSE 250 SmallCap that consist of 100 and 250 stocks respectively.Small-cap stocks require at least 65% of their investor funds to be invested in other small-cap securities.
A multi-cap equity fund invests in stocks of all market sizes, including large cap and small cap companies. They must invest at least 75% of their funds in stocks and equity related instruments such as stock or stock derivatives.Recently, SEBI mandated that multi-cap equity funds invest at least 25% of their portfolios in stocks each category, i.e., large-caps, mid-caps and small-caps. Before this mandate, most multi-cap fund were invested primarily in large caps with limited exposure to other stock categories.
Flexi-cap funds have the same strategy as multi-cap funds, but they also allow managers to reduce their exposure to mid and small cap stocks. This flexibility allows them to allocate more money into lower market cap stocks if needed.Essentially, there are no restrictions on what percentage of the money in the fund can be invested in large-cap stocks, mid-cap stocks, and small-cap stocks.
When it comes to investing in mutual funds, companies of different sizes provide different potential returns and risks. For example, large firms are generally stable and low risk but offer a lower return than medium or small firms. To help investors choose the appropriate mutual fund for their needs, this categorization system is helpful because it gives them information about what they can expect.
It is essential to know the risks associated with each type of mutual fund, as well as what potential rewards you can get from them once you do. Once you are aware of these differences, then it becomes easier for you to create a diversified portfolio that strikes a balance between risk and reward.
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