Q1. I’m a 27 yo marketing professional. I have been mostly investing in index funds and large-cap funds as I initially wanted to keep the risk as low as possible. However, I understand that increased risk appetite can also mean higher returns so I am now considering Multi Cap funds. What do you suggest?
Kshitij Mehta, Agra
Multi-Cap funds have a moderate risk-return profile. As they tend to carry lesser risk compared to pure mid-cap and small-cap funds and can offer more lucrative returns than large-cap funds in favorable market conditions. Hence, multi-cap funds give you the balance of stability and growth.
Over the last several years, top multi-cap funds have beaten the average market returns by a decent margin. Since these mutual funds invest 25% in each of three caps: large-cap, mid-cap, and small-cap, they carry short-term risks. They have the flexibility to invest the remaining 25% in segments they believe will do well.
Multi-cap mutual funds tend to experience short-term volatility, which gets balanced in the long run. That is why it is ideal for a long-term investment horizon. So you can consider multi-cap funds for long-term goals such as retirement plans, children’s education, buying a house, etc.
The main benefit of investing in multi-cap funds is that it allows investors to get exposure to a diversified portfolio. As these schemes invest in equities across various sectors and market capitalization, it averages out their risks.
We’d advise you to also look at factors like expense ratio, past performance, and objective of the fund before going ahead.
Q2. I'm a 25 yo advertising professional who finally has some career stability. I want to start investing but I also find it very intimidating. I have already read about the concepts but how do I go about studying a particular scheme?
Disha Bose, Kolkata
It’s a wise move to do the research yourself rather than just going by recommendations and tips. Here are a few factors that can help you do comprehensive research.
1. Compare the investment goals
For starters, read the fund-related documents to understand the investment objective. Scheme objectives include important factors such as long-term capital appreciation, consistent returns, and tax benefits. It also describes how the fund plans to achieve its objective. The scheme’s investment objective will help you understand whether it is in line with your investment goals or not.
2. Check the expense ratio
The expense ratio and exit load weigh on the net returns from a particular mutual fund scheme. A mutual fund scheme with a lower expense ratio might give higher net returns compared to its peers. We recommend you to go for direct MF schemes because the expense ratio can add up to eat up a significant portion of your returns in the long run.
3. Weighing the risks
You have to define your risk appetite and analyze if the fund’s risk ratio aligns with yours. Market risks can be a combination of interest rate risk, concentration risk, liquidity risk, etc., it can be a good idea to keep yourself informed about these things as well.
4. Asset Allocation
A mutual fund scheme allocates its assets under management to the respective asset classes (such as equity, debt, and gold) under normal market conditions.
For example, a Large-cap Fund must invest at least 80% of its assets in the equity of large-cap companies. The balance can be invested in other equities such as mid-caps and small caps, or debt and money market instruments. Asset allocation helps you judge the risk profile of the scheme.
5. Past Performance
You can check a fund’s past performances over various time frames and also the relative performance of the benchmark index. While evaluating a scheme, consider performance over longer time frames, rather than the short-term performance. Check if it meets the objectives stated in the scheme documents to get a sense of future performance.
Additionally, you can also check the profile and experience of the fund manager.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
Kuvera is a free direct mutual fund investing platform.