Start an SIP in mutual funds — this is a popular refrain among investment advisors. They may suggest different categories of funds to build your mutual fund portfolio, and many of the names — flexi-cap, multi-cap, value fund, growth fund — might sound Greek to you.
Here’s a simple guide to decode some of those terms so that the next time a financial advisor throws such jargon at you, you don’t feel clueless. (This explanation covers only equity fund categories.)
Large-cap funds: These funds, as per SEBI’s definition, must invest at least 80% of their portfolio in large-cap stocks — the stocks of the top 100 companies by market capitalisation. These are usually shares of companies with a market cap of up to ₹1 lakh crore. Large-cap stocks should ideally form the core of your portfolio because their returns tend to be more consistent, and they are considered safer bets.
Flexi-cap funds: As the name suggests, these funds invest across different market caps. They are not bound by strict allocation rules, giving investors exposure to quality large-, mid-, and small-cap companies. However, they must invest at least 65% of their portfolio in equities or equity-related instruments.
Multi-cap funds: These are similar to flexi-cap funds in that they can invest across market caps, but they come with stricter allocation requirements. Multi-cap funds must invest at least 25% each in large-, mid-, and small-cap stocks. Overall, they must allocate a minimum of 75% of their portfolio to equities.
Mid- & small-cap funds: These funds must invest at least 65% of their portfolio in mid-cap or small-cap stocks. Mid-caps are companies ranked 101–250 by market capitalisation, while those ranked beyond 250 are categorised as small caps. Because these companies are smaller, their share prices are more susceptible to sharp movements. They are more volatile and riskier but also have the potential to deliver very high returns.
Beyond market-cap-based classifications, there are also funds that follow specific investment styles. Value funds follow a value-investing strategy — identifying stocks that are ‘cheaply’ valued, such as those trading at less than 20 times forward earnings. Growth funds, on the other hand, invest in companies with high future growth potential, which typically command premium valuations — for example, a new-age tech company trading at 50 or even 100 times earnings.
You may also come across contra funds, which take contrarian bets by investing in sectors that are currently out of favour. Sectoral or thematic funds invest at least 80% of their portfolio in a specific sector (such as banking or infrastructure) or a particular theme.
These are SEBI-specified classifications to ensure that investors clearly understand where their money is being invested and the kinds of risks involved.