By Tensing Rodrigues
A common question that often arises while investing in mutual funds is, in which funds do I invest? The funds derive their nature from the securities in which they invest. Well, perhaps I will have to clarify that first, ‘the securities in which they invest’.
Mutual funds are like baskets. You put your money in them and they in turn invest the collected money in different type of instruments. But they do not invest randomly. Each fund invests in the type of instrument it is supposed to. For this purpose the funds are first divided into five broad categories: Equity, debt, hybrid, solution oriented and other. Let us leave out the last two of the current discussion and focus on the first three. Each group contains several categories. Let us first look at the equity fund categories.
Multi Cap Fund is an open ended equity scheme investing minimum 65 per cent of the total assets across large cap, mid cap and small cap stocks. Large Cap Fund is an open ended equity scheme investing minimum 80 per cent of total assets in large cap stocks. Mid Cap Fund is an open ended equity scheme investing minimum 65 per cent of the total assets in mid cap stocks.
Large and Mid Cap Fund is an open ended equity scheme investing minimum 35 per cent of the total assets in large cap stocks and minimum 35 per cent in mid cap stocks. Small Cap Fund is an open ended equity scheme investing minimum 65 per cent of total assets in small cap stocks.
Clarification on some terms used up to now is due. An open ended equity scheme means a scheme in which you can invest and redeem at any time there being no fixed dates for investment and no fixed term for remaining invested. Market cap categorization is as follows: Large Cap- 1st to 100th company in terms of full market capitalization, mid cap- 101st to 250th company in terms of full market capitalization, small cap, 251st company onwards in terms of full market capitalization.
Let us now look at the comparative nature of these five categories. Actually we need to look at only three categories as the remaining two are combinations of the basic three. Large cap companies are, as the name suggests, the large companies. They will be relatively older and well established companies. This means many things. They have been around for long, you know them and the people behind them well. So it is easier to make a judgment on their future performance.
Remember, investment is all about future performance. The past performance can only be a guide nothing more. For past performance in no way can ensure future performance. So one needs to be objective, prudent and alert to any changes in the company or the people behind it. Of course as an investor in a MF that invests in these companies it is not your job to be on the watch. It is the job of the fund manager. But you need to understand the behavior of the fund manager because her mid-course corrections can reflect in the fund performance and you need to keep your cool.
The large cap companies usually sit on valuable resources in the form of capital assets, human skills, market experience and well recognized brands, which adds to the stability of their valuation, irrespective of their short term financial performance. Stock prices of such companies therefore are likely to be less volatile. But in the same measure, they cannot deliver spectacular performance in good times; for they have lost the novelty, the mystery and the excitement of younger companies, which can give the viagra-boost to the valuation.
All in all, therefore, large cap funds add to the stability of your portfolio. If you wish to play safe invest more in these companies. If you would like to be a little more ambitious, deploy more in mid and small cap companies. The last can spring surprises. Either way they can give you supernormal gains as well as unexpected losses. Their valuation can be very volatile. Let your advisor decide what percentage of your investments should go into these funds, depending upon the market moods and your temperament.
*The author is an investment consultant. Readers can send their comments and queries to email@example.com