Confused between largecap, midcap, flexicap and hybrid funds? How new investors should choose

Are you planning to start investing in mutual funds and confused about which mutual fund category you should choose? Here is how to pick the right category based on your risk appetite, as reported by ETWealth.

Think of the categories on a simple risk-return map. Risk rises from balanced advantage and hybrid funds through largecap, flexicap and multicap funds to midcap and smallcap funds, according to Dilshad Billimoria, MD & Chief Financial Planner, Dilzer Consultants.

The expert said that potential long-term returns may rise along the same path, but higher returns come with deeper and longer draw-downs. Your choice should depend on your investment horizon, financial goals and ability to withstand market volatility.

The expert said that first-time investors may be better off starting with diversified flexicap or largecap funds rather than chasing higher returns through riskier categories.

According to the expert, one should understand that different fund categories serve different purposes in a portfolio. Hybrid and balanced advantage funds can help moderate volatility, while equity funds are better suited to long-term wealth creation.

One should avoid investing in too many categories merely for the sake of diversification, as their underlying holdings may overlap. Instead, build a simple portfolio with two or three complementary funds and invest regularly through SIPs, the expert said.

The expert said that one should review their investments periodically, but avoid switching categories based on short-term performance.

As your income, goals and risk appetite evolve, rebalance your portfolio rather than chasing whichever category has delivered the highest recent returns, the expert said.