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Mutual Fund is broadly categorized into different types, like Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Funds, Money Market Funds and more. These categories are further divided into sub-categories based on market capitalization, maturity period of the instruments they invest in and other factors.

This wide range of schemes that mutual fund offers, make this as the most suitable option for people to invest their money, as they can easily find a fund, suitable for their goals.

Equity mutual funds, one of the type of mutual fund, that invest in stocks and shares of different companies are further sub-divided into categories based on the market capitalization of companies they have invested in. The sub-categories of equity mutual funds based on market capitalization are, large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, and flexi-cap funds.

Let us know about these sub-categories of equity mutual funds one by one and what are the investing strategies they follow.

Large-Cap Equity Mutual Funds…

Large-cap equity mutual funds invest in top 100 companies in terms of market capitalization. These companies are the first 100 companies in an index such as Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The BSE 100 include the largest companies listed on the BSE, and the NSE 100 include the 100 largest companies on the NSE.

Now coming to allocation strategy of large-cap equity mutual funds! As per SEBI (Security Exchange Board of India) it has been made mandatory for a large-cap equity mutual fund to invest at least 80% of the fund’s total assets in equity and equity-related instruments of large-cap companies. The rest 20% it can decide either in debt related instruments or other.

Small-Cap Equity Mutual Funds…

Small-cap equity mutual funds invest in in shares of companies, that have market capitalization, less than INR 500 Crore and are ranked below 250 in terms of market capitalization. The NIFTY Small Cap 100 and BSE 250 Small Cap include the first 100 and first 250 small-cap companies listed on the NSE and the BSE.

Now coming to allocation strategy of small-cap equity mutual funds! As per SEBI (Security Exchange Board of India), it has been made mandatory for a small-cap equity mutual fund, to invest at least 65% of their asset in equity and equity-related instruments of small-cap companies. The 35% of their assets is decided by the fund manager managing the fund. He can either go allocating more asset in equity related instruments or in debt instruments or other place as per their choice.

Mid-Cap Equity Mutual Fund…

Mid-cap equity mutual funds invest in the shares of Mid-Cap Companies. Mid-cap companies are referred to those companies that lie between the 101st-250th largest companies in terms of market capitalization. NIFTY Midcap 100 covers the country’s top 100 midcaps listed on the NSE. The BSE mid-cap index includes the top 100 mid-caps listed on the BSE.

Now coming to allocation strategy of mid-cap equity mutual funds! As per SEBI’s rules and regulation for mid-cap equity mutual funds, these funds have to invest 65% of their funds in equity and equity-related instruments of small-cap companies. Allocation strategy for the rest part of the asset that Is 35%, is decided by the fund manager managing the fund.

Multi-Cap Equity Mutual Funds…

Multi-=cap equity mutual funds as the name suggest are allowed to invest in all market capitalization sizes. Earlier it was mandated by SEBI that multi-cap equity mutual funds have to invest at least 75% of its asset in equity and equity related instruments.

However, it was also directed that the asset allocation in multi-cap mutual funds must match the ‘true-to-level’ strategy. But multi-cap fund asset allocation failed to follow this, as fund manager concentrated most of its asset in large-cap stock, in order to lower the risk of investing in multi-cap mutual funds.

Thus recently, SEBI came up with the mandate for Multi-cap mutual funds stating that, multi-cap equity funds to invest at least 25% each in stocks of each category, i.e., large-cap, mid-cap, and small-cap.

Flexi-Cap Equity Mutual Funds…

Flexi-cap fund is the new equity category mutual fund recently announced by SEBI. It was announced by SEBI to just ease down the problems investors or fund manager might face after the new asset allocation mandate introduced for multi-cap equity mutual funds.

The asset allocation strategy of flexi-cap mutual funds is much more flexible than that in multi-cap mutual funds. Unlike multi-cap equity funds, the fund managers of flexi-cap funds can reduce their exposure to mid and small-cap stocks to zero. This flexibility allows them to allocate a larger proportion of their portfolio to large-cap stocks if needed.

Let Us Sum Up!

Equity mutual funds offer wide range of fund, sub-categorized on the basis of market capitalization. However, before you plan to invest in any, it is must to know the return generating potential and risk associated with these funds. Once you are aware of the differences, you can create a diversified portfolio that can help you strike a balance between risk and rewards.

Keep reading our articles for more updates on finance and investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).