When comparing mutual fund schemes within the same category, most investors look no further than return figures to make their choice. But the truth is, returns are just the tip of the iceberg. Beneath that lies a rich layer of data that paints the true picture, like portfolio concentration, market cap allocation, churn ratio, cash levels, and the fund manager’s style. Each of these plays a critical role in shaping both performance and risk.
Here’s a deep dive into why you need to look beyond returns when comparing funds across some of the popular mutual fund categories.
1) Flexicap funds: One label, many avatars
Don’t assume all flexicap funds behave the same way. Their name only tells you they have the freedom to invest across market caps, but not how they use that freedom.
- Allocation freedom: Fund managers can tilt heavily towards largecap (for stability) or mid/smallcap (for aggression), and the resulting portfolio can look very different.
- Risk profile: A flexicap fund with 70% in mid and smallcaps will be far more volatile than one with 70% in largecaps. However, in reality, most flexicaps schemes in this category have a largecap bias
- Style matters: Some flexicaps pursue aggressive growth, others follow GARP (Growth at a reasonable price), and a few take a value approach. Returns can look similar over some small phases but diverge wildly over time.
- Portfolio diversification: Schemes like Motilal Flexicap are known to take a concentrated exposure with fewer stocks of around 30, whereas most others hold 50+ stocks. The high concentration sometimes boosts the alpha and can also backfire at times. Schemes like Parag Parikh consciously take high cash positions when valuations are expensive to limit the downside, as they have done for over a year now. Parag Parikh also has geographical diversification of about 10% through global stocks.
- Churn ratio: High turnover adds to cost and can signal short-termism. A high-churn flexicap might look nimble but may not build sustainable wealth.
Check the actual market cap exposure, investment style, and churn rate to see what you’re signing up for.
2) Large & midcap funds: Part mandate-dependent and the rest manager-dependent
Large & midcap funds must invest at least 35% each in largecaps and midcaps, but fund managers have flexibility over the remaining 30%.
- Discretionary 30%: Some park it in large caps for stability, others load up on mid/smallcaps to boost returns (and risk).
- Portfolio spread: Number of holdings and weight per stock varies. Some funds bet heavily on about 30 stocks, while others diversify across 50+. In this category, again, Motilal has about 30 stocks. Bandhan, HSBC, and Canara each have over 100 stocks, and HDFC’s portfolio contains more than 200 stocks.
- Fund manager philosophy: Value-focused vs momentum-driven vs blend style, each delivers returns differently and reacts differently to market cycles. Risk too varies accordingly
Don’t just compare past 1-year or 3-year returns. Dig into portfolio composition and fund style for meaningful insights.
3) Midcap funds and smallcap funds: What’s in the remaining 35%?
While midcap and smallcap funds must allocate 65% to their respective segment, the rest is the wildcard.
- Remaining 35%: Can be in largecaps, smallcaps, midcaps, a mix, or even cash, depending on the manager’s outlook.
- Volatility and liquidity: Smallcap funds in particular can face liquidity stress in market downturns. How a fund handles this via cash or staggered exits is a key differentiator.
- Portfolio depth: Concentrated portfolios in these categories can lead to boom-bust cycles. There are schemes with just 40-60 stocks, and there are also those with 200 stocks. Nippon Smallcap has 234 stocks, and Bandhan has 186, and these schemes restrict exposure to each stock to around 3% to derisk. A wider diversification helps in derisking, particularly in the smallcap category, and also to find liquidity for allocation. Excessive buying/selling, especially in low-liquidity segments, adds to costs and erodes return.
Check for stock concentration, liquidity risk, and the quality of mid/smallcap exposure. Past returns hide these crucial traits.
4) Multicap funds: Mandated 75%, flexible 25%
Multicap funds must invest 25% each in large, mid, and smallcaps, and the remaining 25% is at the manager’s discretion.
- Core stability and tactical plays: Managers can use the remaining allocation to double down on preferred segments based on their priority between growth and stability
- Manager bias: If a manager has a strong pro-midcap bias, your multicap might behave more like a midcap fund.
- Volatility risk: A multicap fund with a higher smallcap tilt can be volatile despite its name suggesting balance. Whereas a multicap with largecap bias can be more stable, but may lag on alpha generation.
- Investment style and churn: GARP vs value vs momentum – makes a big difference in consistency of performance. Multicap of Baroda BNP has a high churn ratio of over 100%.
Multicap may not mean as much diversification always. It depends on how the manager uses that discretionary 25% which also can mean 50% can be allocated to a single market cap segment.
5) Balanced advantage funds: The great divide in risk and returns
Don’t be guided by the term “Balanced” as balanced advantage funds can be anything but similar.
- Equity exposure range: Some funds like ICICI & SBI maintain 30–40% in core equity, schemes like Edelweiss, Bajaj and Motilal go all the way to 75%, while some like Kotak, Bandhan, HDFC, Axis etc., take the mid path of around 50-60%, making risk and return profiles entirely different. There are also funds with 0% core equity exposure, like Unifi and Parag Parikh, whose core equity exposure is only in the teens.
- Dynamic allocation method: Some follow pro-cyclical (increase equity as markets rise), others follow counter-cyclical (increase equity as markets fall). Schemes like ICICI and SBI BAF take a counter-cyclical approach, and the likes of Edelweiss and Bajaj take a pro-cyclical approach.
- Rebalancing frequency: Some funds change equity exposure daily, some monthly, others do it quarterly or based on model triggers. Most BAFs have 65% exposure to core equity and arbitrage put together, and the gap to 65% after the core equity exposure is filled with Arbitrage, which makes them qualify for equity taxation.
- Style overlay: Even within equity allocation, styles differ—value, growth, momentum. Some prefer arbitrage and derivatives; others stay fully invested. Some stick to only largecaps with the equity allocation, while others venture into mid and smallcap too.
- Risk vs returns: Those that have followed a counter-cyclical approach with low core equity exposure, like SBI and ICICI, have done well during bear phases like the Covid times and the post Sep’24 period. Those who go heavy on equity have played the bull phase well.
Two BAFs may deliver similar 1-year returns, but the underlying approach might be poles apart, leading to huge divergence later in the returns. Look at allocation history and rebalancing logic. Choose your BAF based on your risk appetite first, and choose the funds that are consistent under that filter.
6) Multi-asset funds: Not just a mix—It’s how the huge mix is managed
Multi-asset funds sound diversified as they can take a mix of domestic equity, debt, gold, silver, crude, REITs, INVITs, and also global equities. But how much they allocate to each asset class and when they do it makes all the difference. In this category, there are schemes which directly invest in securities and also the Fund of Funds, which invests in various schemes instead of individual securities.
- Asset exposure variability: Some funds take 20%+ exposure to gold, others stick to under 5%, even during a gold rally.
- Silver and other commodities: Silver is underused by some funds, despite its potential. The funds that tactically add silver may outperform in commodity bull runs. Certain multi-asset funds hardly take any exposure to silver
- Real assets: REITs/INVITs—many funds skip these completely, yet they can offer yield and diversification. So the funds that tactically play this space could potentially generate better gains and offer stability.
- Global equity exposure: Some funds explore U.S. and emerging markets; others stay purely domestic. Schemes like DSP, ICICI Pru Passive Multi Asset, Nippon Multi Asset Allocation, White Oak Multi Asset, etc., which take decent exposure of around 20% to Global equities, mostly US, have benefited from the rally of stocks there. Global equities also offer geographical diversification, acting as a hedge to Indian equities.
- Varied domestic equity exposure: The domestic equity exposure(core equity + arbitrage) is also different fund to fund, and the market cap allocation. There are also funds with no core equity exposure in this category, like Edelweiss. The overall equity exposure in schemes of Nippon, DSP, WhiteOak, SBI, etc., is more than 35% and below 65%. There are also schemes like ICICI Pru Multi Asset, Baroda BNP Multi Asset, UTI Multi Asset, HDFC Multi Asset, etc., which hold more than 65% in Equity.
- Taxation based on domestic equity allocation: Based on the equity allocation, the taxation of the schemes also varies. If Equity exposure is more than 65%: Taxed as equity fund-20% on gains earned upto 1 year and 12.5% for gains over 1 year. If Equity is 35 to 65%: Taxed as per the tax slab upto 2 years and at 12.5% beyond 2 years.
The frequency and dynamism in asset allocation changes, and how opportunistic the fund is with underappreciated asset classes to capitalise on the opportunity, matter. Don’t miss sight of the taxation either. After all, what you take home after taxes only belongs to you.
Other vital factors to compare beyond returns
Regardless of the fund category, keep an eye on:
- Fund manager tenure and philosophy: Long-tenured managers bring consistency. Philosophy of the fund house and the fund manager matters. If the Fund House has a strong investment philosophy that governs the fund management of the scheme, then Fund Manager changes may not impact much.
- Expense ratio: Sometimes, higher TERs are justified if the fund actively manages with superior insights to offer higher alpha. Low cost isn’t always best if that doesn’t take it to the top in returns.
Do the homework, not just the return math
Returns are important—but they’re only the output. True fund comparison lies in understanding the input variables — allocation strategy, style, risk tolerance, and asset class usage. Two funds in the same category may appear similar on the surface, but behave very differently during a crash, a rally, or a sideways market.
V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.