Are Multicap and Hybrid Funds the Same? Understanding the Difference
The availability of wide options has played a crucial role in the popularity of mutual funds. There’s a fund available for almost any goal you wish to accomplish. That said, investors often tend to get confused between various funds. Multicap and hybrid funds are two funds that usually confuse investors, who feel they are the same. However, they aren’t.
Multicap Fund Meaning
Multicap funds are equity mutual funds that need to hold a minimum of 75% of assets in equity and equity-related instruments at any given point in time . These funds need to allocate a minimum of 25% each to large-cap, mid-cap and small-cap stocks. This approach of multicap funds positions them to capture mid-cap and small-cap opportunities while large caps lend them stability.
Hybrid Fund Meaning
Hybrid funds are mutual funds that invest in a mix of asset classes. While on most occasions, they invest in a mix of equity and debt, on other occasions, they also invest in gold and real estate. The allocation to each asset class depends on the type of hybrid fund, which could be aggressive, conservative or balanced.
Key Differences Between Multicap Funds and Hybrid Funds
Multicap funds and hybrid funds differ on several aspects (see table):
| Aspect | Multicap Funds | Hybrid Funds |
|---|---|---|
Investment Objective | They are equity funds that focus on capturing growth opportunities across companies in different market caps. | Hybrid funds aim to offer a mix of growth and stability by investing in equity and debt. |
Asset Allocation | These funds invest 25% each in large-cap, mid-cap and small-cap stocks. | The asset allocation of hybrid funds depends on the type of fund. While the equity portion is less for conservative hybrid funds, it’s more for aggressive hybrid funds. |
Risk | As multi-cap funds are purely equity funds, risk is high. | Hybrid funds are relatively less risky than multi-cap funds due to exposure to debt. |
Flexibility | Multicap funds enjoy greater flexibility as they can invest across companies in different market caps. | Though hybrid funds can invest in different asset classes, the flexibility is less compared to multicap funds. |
Choosing Top Multicap Funds and Best Hybrid Funds
Opting for top multicap funds and the best hybrid funds entails factoring in several aspects. These include:
- Long-term Performance
Check the fund’s long-term performance, ideally over 5 to 8 years and see how consistent the returns are. Opt for funds that have offered consistent returns over the long term. Various financial websites can help you find and analyse a fund’s long-term performance.
- Check the Expense Ratio
Keep a special eye on the fund’s expense ratio. The expense ratio is the fee the fund house charges for managing your investments. A high expense ratio can drag your overall gains.
- Your Risk Tolerance
Estimate your risk tolerance accurately before investing in top multicap funds or the best hybrid funds. Being pure equity funds, multi-cap funds carry higher risks than hybrid funds. If you have a high-risk appetite, you can opt for multicap funds. On the other hand, if you’ve a moderate risk appetite, you can opt for hybrid funds.
Conclusion
While multicap and hybrid funds offer diversification, they aren’t the same. While the former provides diversification within equities, hybrid funds diversify within asset classes. Choose a fund that matches your goals and risk tolerance. Having both can help you build a robust mutual fund portfolio.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
