There are different types of equity funds that are categorised based on their investment strategy and also underlying portfolio composition. Some are based on market capitalisation, some have a sectoral theme, and some have a different investment strategy. In this article, we will discuss the differences between multi cap vs focused equity funds.
Multi Cap vs Focused Equity Funds
The following table shows the differences between Multi Cap and Focused Equity Funds.
|Parameters||Multi Cap Fund||Focused Equity Fund|
|Meaning||Multi cap fund invests in companies’ stock across market capitalisation||Focused Equity fund invests only in a limited number of stocks|
|Portfolio Composition||As per SEBI guidelines, a multi-cap fund should allocate a minimum percentage of investments in -Large cap: 25% Midcap: 25% Small cap: 25%||The portfolio of these funds can invest only up to 30 stocks in any size company|
|Risk||These funds are less risky than focused equity funds due to diversification||These funds are riskier than multi-cap funds as they have a concentrated portfolio.|
|Sectors||The fund portfolio invests in companies across sectors.||The fund portfolio invests only in a few sectors|
|Theme||Less likely to focus on a particular theme for the fund||May adopt a particular theme for the fund. For e.g., avoiding PSU stocks|
|Fund Manager Role||The fund manager has to diversify the portfolio risk and also select companies of different market caps with high potential.||The fund manager needs to have the necessary skills and also expertise in choosing the best 30 stocks with the highest growth potential|
Who Should Invest in Multi Cap Funds?
Multi cap funds are a good way to diversify across market capitalisations and are suitable for investors who have long term financial goals. Also, for a new investor who is unfamiliar with the asset allocation strategy of investing, multi-cap funds can be a good starting point. Furthermore, this makes investing style simple as investors need not worry about identifying large, mid or small-cap funds and deciding on their asset allocation. Hence, the fund manager does the stock pick and makes a diversified portfolio for investors.
Since multi-cap funds have the flexibility of investing, it provides the potential to maximise returns while minimising risk through diversification. Therefore, investing in this fund can be helpful for long term wealth creation.
Popular Multi Cap Funds
Who Should Invest in Focused Equity Funds?
Focused funds entire strategy is to build a concentrated portfolio by identifying the right stocks and generating significant returns. Therefore, the fund manager rigorously selects stocks for the fund’s portfolio. However, higher rewards are accompanied by higher risk (losses). Sometimes too much focus on a few stocks might either reach the bull’s eye or entirely miss the goal.
The focused funds follow a top-down approach to select stocks. Therefore, investors with high-risk tolerance levels, who wish to invest in equity schemes and do not want too many stocks in the portfolio, can consider investing in focused funds. Furthermore, it is necessary to have a long-term investment horizon as it will be able to average out the market volatility and generate significant returns.
Therefore, investing in equity mutual funds should be essential for your portfolio, depending on your investment goals. Also, it gives you an opportunity to make the most of the offerings available across the market. However, you must consider understanding the style and strategy adopted by the Multi-Cap vs Focused Equity Funds and know the risk and return features of the fund to make them a part of your portfolio based on your financial objectives.
Popular Focused Equity Funds