There are thousands of mutual fund schemes in India and it looks impossible to compare them. It is not, because SEBI mandates the categories — the label on a fund is a legal constraint on what it may hold, not marketing.
The equity categories that matter
| Category | What it must hold | What that means |
|---|---|---|
| Largecap | At least 80% in the top 100 companies | The most stable equity category. Also the hardest for a manager to beat, because these are the most researched companies in India. |
| Midcap | At least 65% in ranks 101–250 | Higher growth, materially deeper drawdowns. |
| Smallcap | At least 65% in rank 251 onwards | The widest range of outcomes. Has fallen 50–65% in serious bear markets. |
| Flexicap | At least 65% equity, any market cap, manager’s discretion | The manager decides the mix. You are buying their judgement. |
| Multicap | At least 25% each in large, mid and small | Forced diversification across sizes. Cannot hide in largecaps during a smallcap crash. |
| ELSS | At least 80% equity, three-year lock-in | Tax deduction under the old regime. The lock-in is also a behavioural benefit. |
| Index fund / ETF | Replicates an index mechanically | No manager judgement, lowest cost, no chance of beating the index by design. |
Hybrid categories
- Aggressive hybrid — 65–80% equity, rest debt. Taxed as equity, which is the main attraction.
- Balanced advantage / dynamic asset allocation — the equity share moves with a valuation model. The rules vary enormously between funds; read the actual methodology rather than the category name.
- Conservative hybrid — mostly debt with a small equity sleeve. Taxed as debt.
- Arbitrage — exploits cash-futures spreads. Low return, low risk, and taxed as equity, which is why it is used as a short-term parking place.
How to actually compare two funds
- 1Same category, always
A midcap fund beating a largecap fund has told you that midcaps outperformed, not that the manager is good. Comparisons across categories measure style, not skill.
- 2Against the category’s own benchmark
Every fund declares its benchmark. If it did not beat that, the manager added nothing you could not have bought more cheaply.
- 3Expense ratio, and the direct plan
Charged annually on your whole balance whether the fund wins or loses. Confirm you hold the direct plan — same portfolio, roughly 0.5–1% cheaper every year.
- 4Rolling returns, not point-to-point
A single start date can flatter or destroy any fund. Rolling returns across many overlapping periods show consistency rather than luck of timing.
- 5For index funds, tracking error
The only meaningful differentiator between two funds tracking the same index. Lower is better; it measures how faithfully the fund replicates.
Reading the label
2 questions. Answers are revealed once you submit all of them.
1.Smallcaps fall 45%. You hold a flexicap fund and a multicap fund. What should you expect?
2.What is the only meaningful comparison between two index funds tracking the same index?
Dukaan pe likha hai "Special Basmati" — par asal mein kaun sa chawal hai, yeh toh bori pe chhoti print mein likha hota hai. Fund ke naam ka bhi yahi haal hai. "Opportunities Fund" se kuch pata nahi chalta; SEBI ki category aur portfolio dekho, tabhi samajh aayega ki paisa kahan ja raha hai.
- SEBI mandates the categories, so the label is a legal constraint on holdings.
- Flexicap gives the manager discretion; multicap forces at least 25% smallcap at all times.
- Compare only within a category, and against the fund’s declared benchmark.
- For index funds, expense ratio and tracking error are the only real differentiators.
- Eight equity funds is usually one portfolio with eight expense ratios.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- flexi cap fund meaning
- A flexicap fund is an equity mutual fund that must keep at least 65% of its portfolio in equity but is free to spread that across largecap, midcap and smallcap companies in whatever proportion the manager chooses. The category is defined by that freedom, so what you are buying is the manager’s judgement about where to sit rather than a fixed exposure to any one size of company.
- difference between flexi cap and multi cap fund
- A multicap fund must hold at least 25% each in largecap, midcap and smallcap stocks at all times, while a flexicap fund only has to hold 65% in equity and can allocate across sizes however it likes. The names sound almost identical and the behaviour is not: when smallcaps fall hard, a multicap manager is legally unable to cut that 25%, whereas a flexicap manager may already have shifted towards largecaps.
- the lock in period for elss mutual funds is
- Three years from the date of each investment, which is the shortest lock-in among the tax-saving options under Section 80C. Each SIP instalment locks in separately for three years from its own date, so a monthly SIP unlocks in monthly tranches. An ELSS scheme must also hold at least 80% of its portfolio in equity, and the 80C deduction it carries is available only under the old tax regime.
- how much must a largecap fund hold in largecap stocks
- At least 80% of its portfolio, with largecap defined by SEBI as the top 100 companies by market capitalisation. The remaining 20% can go elsewhere. The equivalent floors for the neighbouring categories are 65% for a midcap fund in companies ranked 101 to 250, and 65% for a smallcap fund in companies ranked 251 and below.
- tracking error meaning in index fund
- Tracking error measures how far an index fund’s returns drift from the index it is meant to replicate, expressed as the variability of that gap. Lower is better, because the fund’s entire job is to copy the index rather than to differ from it. Since two funds tracking the same index hold the same securities in the same weights, tracking error and expense ratio are the only things genuinely left to compare.