CEO Speak

Many a times we come across customers who seem to be confused as to which scheme of mutual funds should they be investing into or, if they are already invested , they wonder if they have invested into the right funds or not. From retail to high net worth individuals and from first time to seemingly regular investors – a lot of them go through this insecurity and doubt about the choice of funds they have made. They also get confused when they come across certain category of funds giving higher returns than some other type of funds.

To address this issue, I intend to briefly explain the types and characteristics of a few broadly categorised funds which will not just explain the investment objectives but also steer you clear of any confusion and set your expectations right from each of these types of funds.

Large Cap Funds: They are mutual funds which invest in very large companies/ companies with very large market capitalisation. Due to their size and business maturity, Large cap companies are viewed to give stable and sustainable returns, however, they may not offer the same opportunities for growth as given by small cap or mid cap companies.

Multi Cap Funds: They are mutual funds that invest in stocks across market capitalisation. They can have a combination of large cap ( very large well established companies) as well as mid cap but are relatively less risky compared to pure mid cap / small cap funds and are suitable for not so aggressive investors who intend to invest in the equity markets.

Small and Midcap Funds:Small Cap funds invest into small companies which are yet to get into the established business bracket. While they are at the lowest end of the market capitalisation graph, well researched small cap stocks can be potentially big gainers. Mid cap funds invest into midsized established businesses which are still considered developing companies. Mid Sized companies rank between the two extremes on all important parameters like size, revenue, employee, client base etc. Both these kind of funds are meant for investors with higher risk appetite than large cap investors, as they tend to be more volatile than large cap stocks.

Dynamic Equity Funds:As the name suggests, these funds dynamically manage their equity portfolios, investing more in equities when markets are down and less when the markets are up. They have a mix of Equity and debt in their portfolios and allocate less to equities when the market valuations seem expensive and vice versa. These funds, by design, automatically rebalance portfolios and are suitable for investors with lower risk appetite or even first time investors into equity funds.

Short Term Income/Debt Funds: There are different types of debt mutual funds that invest in various fixed income securities of different time horizons. Short Term Funds typically have an average maturity that is longer than pure liquid funds but shorter than pure Income funds. These funds are suitable for conservative investors who have low to moderate risk appetite and an investment horizon of 6 to 18 months.

Long Term Fixed Income Funds/Accrual Funds: These funds invest in longer tenure instruments like government securities and corporate bonds which have longer average maturity than short term funds. This relatively higher maturity of income funds makes them slightly more susceptible to interest rate risk, which over a period of 3 or more years gives a healthy return to an investor who has chosen to allocate funds in this debt segment. They are an ideal replacement for investors who have traditionally invested in 3 year fixed deposits, and more tax efficient.

I have given an illustration below just as an example of recommended asset allocation vis a vis the risk profile of an investor for your understanding. It’s advisable to slot the schemes that one invests, into these categories while doing one’s asset allocation.

Category Conservative Moderate Aggressive
Large Cap 15%  20% 10%
Multi Cap 15%  15%  25%
Small / Mid Cap 0%  10%  25%
Dynamic Equity 20%  10%  15%
Balanced 10%  15%  0%
Short Term 20%  20%  10%
Long Term / Accrual 20%  10%  15%

I would advise all investors to assess their risk appetite and investment horizon before doing any asset allocation in any of the mutual fund segments and also review their investment portfolio at regular intervals, preferably at least once in six months. It is important that one does prudent asset allocation and does not worry about the returns in the individual fund category.

Disclaimer – This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns. This material provides general information and comparisons made (if any) are only for illustration purposes. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.