Investing in mutual funds has become integral to the financial planning journey for many in India. As you embark on your investment voyage, you are likely faced with an important question: value or multicap funds? To make an informed decision, let’s break down these options and explore the nuances that can shape your investment strategy.
Understanding value funds
Value funds are akin to financial detectives seeking out hidden gems in the stock market. These funds aim to identify undervalued companies and trade at a discount on their intrinsic worth. The fund manager believes these stocks can deliver substantial returns once the market recognises their true value. In essence, value funds focus on finding diamonds in the rough, making them ideal for investors with a patient outlook.
Multicap funds: A blend of funds
Multicap funds, short for multicapitalisation funds, are mutual funds that invest in stocks across different market capitalisations. Market capitalisation refers to the total market value of a company’s outstanding shares of stock and is categorised into large-cap, mid-cap, and small-cap. Multicap funds, as the name suggests, have the flexibility to invest in companies of various sizes.
Factors to consider when choosing between value and multicap funds
When determining whether to invest in value funds or multicap funds, there are several factors to consider based on your investment needs and goals.
Your investment time horizon refers to how long you plan to stay invested. Value funds typically require a longer time horizon, which can take time to realise significant gains. Multicap funds may be suitable for both short and long-term goals due to their diversification across market caps.
Value funds primarily invest in undervalued stocks, which tend to be riskier. Multicap funds spread risk across large, mid and small-cap stocks. If you have a lower risk tolerance, multicap funds may be a better choice.
Over the long run, value funds have the potential for higher returns than multicap funds. However, returns are not guaranteed, and there may be periods of underperformance. Multicap funds aim for more stable returns through diversification.
Multicap funds provide instant diversification across market caps, while value funds are concentrated in undervalued stocks. For maximum diversification, you could consider investing in both fund types.
Costs and fees
Expense ratios for value and multicap funds can vary depending on the fund company and specific fund. Compare fees for different funds to determine the most cost-effective option based on your needs.
To wrap up
As an investor, you must weigh these factors and choose a path that aligns with your priorities. The good news is that either choice can help you work towards achieving your investment objectives if you stay invested for the long haul. The key is taking that important first step to start investing in the stock market, regardless of the fund type. Your future self will thank you.