Building a long-term mutual fund portfolio requires not just consistent investing but also the right fund selection. Many investors with an existing portfolio often face confusion when adding new schemes, especially when options include actively managed funds and factor-based index funds. Understanding how these funds differ is crucial for making the right choice.
A similar query came from Renu, an investor from Delhi and a viewer of The Money Show on ET Now. She is currently investing Rs 35,000 per month in mutual funds, with a total SIP corpus of Rs 4 lakh, and is looking to invest an additional Rs 10,000-Rs 15,000 per month via SIP for a 15-year horizon. She already has exposure to mid, small, flexi-cap, and contra funds and is now evaluating whether to add a multicap fund or a factor-based index fund to her portfolio.
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Her current portfolio includes Motilal Oswal Midcap, Quant Smallcap, Parag Parikh Flexicap, and SBI Contra.
According to financial expert Harshvardhan Roongta, the investor’s current portfolio is well-diversified across categories, and there may not be a need for major changes. The focus should instead be on carefully selecting any additional investment that complements the existing allocation.
The expert said that while both options under consideration are multicap funds, they operate very differently.
When it comes to the two options, Nippon India Multicap Fund and Edelweiss Nifty 500 Multicap Momentum Quality 50 Index Fund, the key lies in understanding their investment approach.The Nippon India Multicap Fund is an actively managed scheme where the fund manager allocates investments based on internal research. As per multicap norms, the fund maintains a minimum allocation of 25% each to large-cap, mid-cap, and small-cap stocks, while the remaining portion is invested at the fund manager’s discretion. This approach offers flexibility but depends heavily on the fund manager’s decisions.
“In this case there is no preset formula, there is no factor applied. The fund house can, based on their research, allocate and buy into any companies in this category,” the expert said.
On the other hand, the Edelweiss Nifty 500 Multicap Momentum Quality 50 Index Fund follows a rule-based strategy. It selects stocks based on predefined factors, primarily momentum and quality, from a broader universe of 500 companies. The portfolio consists of 50 stocks and aims to replicate a specific index, making it more systematic but potentially more volatile depending on market trends.
The expert further said, “The Edelweiss Nifty 500 Multicap Momentum Quality 50 is a factor-based multicap fund with specific filters applied. Momentum and quality are the two factors that are used to shortlist 50 companies out of the universe of 500.”
Roongta highlighted that while both funds fall under the multicap category, their investment styles are fundamentally different. The factor-based fund relies on mathematical filters and market trends, whereas the actively managed fund depends on research-driven stock selection.
For investors who understand factor investing and are comfortable with the associated volatility, the Edelweiss index-based option may be worth evaluating. However, for most retail investors, especially those who prefer simplicity and ease of understanding, an actively managed multicap fund like Nippon India Multicap may be a more suitable addition.
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Ultimately, the decision should align with the investor’s understanding, risk appetite, and long-term goals. For a 15-year investment horizon, maintaining consistency, avoiding unnecessary complexity, and staying invested through market cycles remain key to building wealth.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)