Demystifying Multi-Cap Funds
These funds invest in stocks from across market capitalisations. These funds need to have an investment of at least 75 per cent of their portfolio in equities and equity-related investments at any point of time. The mandate says that a minimum of 25 per cent each must be invested into large-cap, mid-cap and small-cap stocks. The balance 25 per cent can be invested as per the discretion of the fund manager.
An investor can achieve diversification within equities by investing in these funds, and wouldn’t have to keep an eye on the market in terms of which category of stocks is performing at that particular time.
The large-cap portion in multi-cap funds gives stability to your portfolio, while the small-cap portion gives you the opportunity to generate an alpha. An investor who is mature, has a long-term horizon of three to five years and who is looking at a better risk-return profile may consider investing in the multi-cap category of mutual funds.
Different categories provide different risk-and-return profiles. So, suppose you plot on a graph, and you have returns on the X axis and risk on the Y axis, you will get a common intersection point. Large-caps provide the least risk, but their returns could be relatively less. If you move on to the next category, which is flexi cap, the returns will be superior to large-cap funds, but there will be higher risk, too, because that category invests across the market.
Now if you move to the next category of multi-caps, it will have higher risk but also higher return potential. Beyond that, if you move to mid-caps and small-caps, the risk-return profile changes proportionately. The risk is higher in the last two categories, but the return potential is higher too.
Flexi-Cap Vs Multi-Cap
Typically, flexi-cap funds follow NSE 500 as benchmark. If you look at the composition of the benchmark in terms of market caps, then large-cap dominates around 75 per cent of the index. Plus, if you compare that with multi-cap funds, by definition or by mandate, they need to have a minimum 25 per cent exposure to small-, mid- and large-caps each. Therefore, the latter give you a far better opportunity to diversify across market caps.
Things To Keep In Mind
Investment Horizon: Investors opting for multi-cap funds should have a reasonable time horizon of at least three to five years. Investors need to understand that the exposure to mid-cap and small-cap stocks is higher in these funds, and this exposure results into higher volatility.
Choice of Fund House And Scheme: It is also important for the investors to look at the philosophy of the fund house, the track record of the scheme and its distinctive features.
Fund Manager’s Role: Capital markets regulator Securities and Exchange Board of India has defined the top 100 companies as large-caps, the next 150 as mid-caps, and beyond the first 250, there’s an ocean of small-caps. It depends on the fund manager’s ability to select the right stock. It is this selection ability that can make a big difference in the returns generated from the fund.
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