Building a diversified investment portfolio is crucial for reducing risk and earning risk-adjusted returns. Two popular options are multi-cap mutual funds and multi-asset allocation mutual funds. While both can help you build a diversified portfolio, there are key differences between the two.
A multi-cap mutual fund invests at least 75% of its money in equity and equity-related instruments, with a minimum 25% allocation to large-cap, mid-cap, and small-cap companies. This makes it suitable for investors with an aggressive risk profile.
A multi-asset allocation mutual fund, on the other hand, invests in at least three asset classes, with a minimum 10% allocation to each. This includes domestic equity, gold and silver, fixed income, real estate, and international equity. The fund manager has flexibility to adjust allocations based on market conditions, making it suitable for investors with a moderate to aggressive risk profile.
Key differences between the two include the level of risk, flexibility, and suitability for investors. Multi-cap funds carry a higher risk due to diversification within the equity asset class, while multi-asset allocation funds carry a relatively lower risk with diversification across asset classes.
A comparison of the returns of the two categories shows that multi-cap funds have underperformed in the last one year, while multi-asset allocation funds have outperformed. However, over the 3- and 5-year periods, there is not much difference in performance.
Ultimately, a good multi-asset allocation fund can provide both diversification across asset classes and within the equity asset class. However, if an investor needs specific equity allocation to large, mid, and small-cap companies, a multi-cap fund can be added.
