Split investments among various categories to get a balance
Choose a fund that suits your needs
What is the difference between a diversified fund and a flexi/multi-cap fund? Which of these are better for a retail investor? —Amit Rao
Stocks in the equity market are categorized in different ways. One way of categorization is by sectors—banking, fast-moving consumer goods, pharmaceutical, etc. Another way of categorization is by how big companies’ market capitalizations are—large cap, mid cap, etc. Mutual funds adopt a parallel nomenclature for their equity funds. The categories of funds that you refer to fall in different categorization frameworks.
Diversified funds are labelled in this way to distinguish them from funds that invest in a focused manner in a particular sector. These funds do not have sector-specific constraints for making investments.
Similarly, flexi-cap or multi-cap funds are called so to distinguish them from funds that invest in particular segments of the market exclusively. As opposed to large-cap funds or mid-cap funds, multi-cap funds do not have preference with companies with particular market cap sizes.
Thus, both these categories allow a fund manager to pick from a wide array of choices without one form of restriction or another. From a retail investor’s perspective, the differences between these two labels are thin. Funds in either category could be considered slightly more risky than pure large-cap funds, and less risky than small- and mid-cap fund or funds that focus on a particular theme or market sector. An investor can choose funds from such categories to achieve broad diversification and to entrust money to a fund manager who can operate with few constraints.
I want to invest some money for two years. What options do I have other than fixed deposits? —Rehman
An investment time frame of two years does not provide much of an opportunity for taking risks with your investments. For such a period, investing in equity mutual funds could backfire and cause an erosion of invested capital. So, it would be wise to stick to pure debt or debt-oriented funds. Pure debt funds have no investments in the equity market and, for periods exceeding one year, offer the benefit of indexation that will increase the post-tax returns from your investment. Debt-oriented funds have 10-20% exposure to equity markets (allocation varies from scheme to scheme) and thus provide an opportunity to make returns that are slightly better than debt market returns. These funds also offer an indexation benefit for tax purposes. Split your investments between these two categories to get a balance.
Good short-term debt funds are UTI Short Term Income and PineBridge-India Short Term. Good debt-oriented hybrid funds will be Birla Sun Life MIP II Savings 5 and IDFC Monthly Income Plan.
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