Multi-Cap Funds: 5 Things You Must Know
There are several types of mutual funds classified on various parameters. These classifications help investors choose the fund that suits them best. One example of classification is based on market capitalisation (market cap). There are three market caps, Large, Mid and Small, and some equity mutual funds invest in these, including multi cap funds. According to SEBI Large-cap companies are the top 100 stocks, Mid-cap stocks rank from 101 to 250, and Small-cap stocks rank from 251 onwards. Large-cap funds invest in stocks with large market capitalisation. Mid-cap funds primarily invest in shares of mid-cap companies. Small-cap funds invest mostly in stocks of small companies.
All of these funds have different advantages and disadvantages. Large-cap funds tend to provide stable and modest returns. They are in a better position to withstand a market downturn. However, they may underperform when there is a bull run. Mid-cap mutual funds are riskier. But, they can provide potentially high returns during a bull market. Small-cap funds are at the other end of the investment spectrum. They have the potential for generating very high returns. But, they are also very vulnerable to losses when there is a downturn.
If however, you want to take advantage of the benefits of each, you can opt for multi cap mutual funds.
Multi cap funds are also equity-oriented and like any other mutual fund they have to invest according to SEBI mandate. Such funds need to have a minimum corpus of 65% invested in equity. The portfolio of this type of fund comprises a mix of all market cap stocks.
Flexibility in investments:
Due to their nature, multi cap funds can invest across market capitalisations and can take advantage of opportunities across the market. There is no mandate to invest only in certain kind of companies.
A fund manager can switch out portfolio composition to maximise returns. Let’s say when markets are bullish; large-cap stocks underperform, he or she can change the asset composition to include mid-cap stocks which have a better value.
In another scenario, in bearish markets, mid-cap or small-cap tend to do poorly. Again here, the fund manager can switch the portfolio to more stable large-cap stocks.
In this way, this type of fund gives a fund manager more choice. He or she has an edge in any market condition. Multi cap funds’ performance thus depends on the ability of the fund manager to vary the equity allocation proactively, across different market caps.
Now, let us consider the risks associated with multi cap funds. These funds are riskier than pure large-cap ones but less risky than pure mid-cap and small-cap funds. In case of a market downturn, a fund manager can play safe.
The returns from these funds depend primarily on the fund manager. His or her view of the markets influences returns. It will depend on how the manager picks stocks based on market conditions. These funds have the potential to offer higher returns. Over three years, these funds have given average returns of 6%-9 %. Average Returns over five years stands at 9%-12% range over different market phases. Some of the funds have given returns as high as 13%-15% over a five-year time horizon.
Multi cap funds have found more favour with investors recently due to revised SEBI norms. Fund categories are now strictly drawn out. Earlier, large-cap funds could bet on mid-cap stocks too when they were doing well; currently, there is no flexibility. Multi cap funds are meant for investors, who have a moderate risk appetite. These funds invest in mid and small-cap stocks too making them riskier. However, over medium to long-term horizons (5-7-years), they have the potential of offering high returns. Also, to maximise profits, choose the SIP route.
Investors fear that they may miss out on market rallies, multi cap mutual funds can help you get the most of a bull market. At the same time, it can ride out bear markets too. These funds are a good option if you want to participate in full market cycle over medium to long terms.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.