Balanced and multi-cap mutual funds stand out for their unique investment strategies among other mutual-fund categories. Balanced funds invest in a combination of debt and equity-linked instruments, and multi-cap funds allocate their corpus in a portfolio of equity and equity-related stocks of companies with varying market capitalizations. This article explores the advantages of both these investment avenues.
Balanced mutual funds and their advantages:
Balanced funds, called hybrid funds, are designed to create a balanced investment portfolio by combining debt and equity instruments. Here are the key advantages of balanced mutual funds:
- They offer diversification: One of the advantages of balanced funds is diversification across asset classes. By investing in equities and debt instruments, balanced funds spread the risk associated with fluctuations in the stock market.
- Balanced funds offer steady returns: Debt instruments, such as government bonds and corporate debt instruments, can help limit the downside during periods of market volatility.
- Balanced funds help you manage risk: Balanced funds aim to maintain a proportional asset allocation, which allows investors to manage risk effectively.
- Professional management: Experienced fund managers oversee balanced funds, analyzing market trends and adjusting the portfolio mix accordingly.
- Balanced funds offer high liquidity: Balanced funds allow investors to buy or sell units at the prevailing Net Asset Value (NAV) on any business day. This makes them suitable for both short- and long-term investment horizons.
- Balanced funds are tax-efficient: Depending on the holding period, these funds could be tax-efficient for your overall financial goals.
Multi-cap mutual funds and their advantages:
Multi-cap mutual funds are known for their flexibility in choosing stocks with varying market capitalizations. Fund managers can invest in large-cap, mid-cap, and small-cap stocks based on market conditions and growth opportunities:
- Investors can diversify across market capitalizations: A concentration risk arises when an investor invests in multiple funds having the same investment strategy. Multi-cap funds provide inherent diversification across market capitalizations, which helps reduce concentration risk.
- Multi-cap funds offer flexibility: Unlike sector-specific funds, multi-cap funds provide flexibility to adapt to changing market dynamics.
- Multi-cap funds provide comparatively higher returns: These funds invest in established large-cap companies with stable growth and smaller companies with higher growth potential. This balanced approach offers the opportunity for potentially higher returns.
- Multi-cap funds are actively managed: Multi-cap funds require active management, as the allocation to different market caps needs constant monitoring and adjustments. This dynamic approach ensures that the fund remains aligned with the fund manager’s investment strategy.
- Multi-cap funds are less volatile: Compared to mid-cap or small-cap funds, they exhibit lower volatility due to their diversified nature. This makes them suitable for risk-conscious investors seeking exposure to equities.
Investing in balanced and multi-cap mutual funds can be prudent for investors seeking a balanced and diversified investment approach. Before investing, it’s essential to analyze the past performance of the funds, evaluate their risk profiles, and consider the track record of the fund managers. Additionally, investors should align their investment choices with their financial goals and risk tolerance.