Mutual Fund Basics

By the simple definition Mutual Fund pools the money of the investors, who share a common financial goal and invest the corpus collected into a number of financial instruments to maximize the returns.

We can divide the mutual fund by using many criteria. One of the very popular criteria is market capitalisation. Before going forward we should know here about market capitalisation. The market cap is that figure which we obtain from the total no. of outstanding shares of a company in the stock market multiplied by the market price of the company’s share.

By the market capitalisation method, we can divide the mutual fund into three types:

1.   Large Cap

2.   Mid Cap

3.   Multi Cap

Large Cap Mutual Fund

The returns are generally low when compared with other asset classes as they are exposed to lesser risk, but on the long term, these funds have outperformed its peers. It is advisable to invest in Large-cap Mutual funds during volatile market conditions. The primary objective of the large cap mutual funds is to generate robust capital growth by investing investor’s pooled fund into the large bluechip and frontline companies whose market capital is large. Different mutual fund houses have different parameters for selecting the large cap companies in their large cap mutual fund. More than 1000 crore of market capitalization are taken as large cap companies by the most of the fund houses.

Mid Cap Mutual Fund

As we can understand by its name that this type of funds invest into mid sized companies that have the potential to generate higher return. It is more voletile and having much risk than large cap mutual fund. Investors who want to diversify their portfolios and willing to take a certain amount of risk should definitely invest money in these kinds of funds for a longer period of time. Most of the fund houses consider, Rs 500 crore  to Rs 1000 crore market capital companies as a mid cap  companies. The Mid cap companies are directly related with the market movements and generate solid returns during market upswing.

Multicap Mutual Fund

This type of fund invest investor’s money into various types of companies including large , mid and small cap which can generate the decent and stable return. The major advantage of these types of fund is that the investor’s money invested into many sectors and many type of companies, so if one sector perform bad the other sector balance the loss by making good return. It is perfect investment instrument for those who want growth as well as stable return.

So at the end of this article one thing is very clear that depending upon the risk appetite, an investor should invest into these different types of mutual funds for a longer period of time. Large Cap Funds offer a stable return with exposed to less risky assets while Mid Cap mutual funds gives a higher returns but exposed to higher risks. Multi Cap mutual funds are perfect for investors expecting a decent return and without being exposed to too much risk.

(If you have any query or feedback about investment or financial planning please feel free to share.)

Regards,

Arvind Trivedi

Certified Financial Planner