Is it Best to choose a Multi Cap Fund ?

Is it Best to choose a Multi Cap Fund ?

As an equity mutual fund investor there are so many choices like large cap, mid cap, small cap, multi cap, or sectoral funds. Every type of mutual funds has its own benefits and weaknesses at a specific point in the economic cycle. Large cap funds provide better stability to a mutual fund portfolio, mid cap, and small cap funds provide remarkably high returns in bull markets. In addition to these mutual funds, sectoral funds may offer better returns when a particular sector is doing good. A large cap fund will not be able to invest in mid and small cap stocks even if the valuations in these markets might seem beneficial. Likewise, a mid cap fund is required to remain in mid and small cap stocks even though the stock market in Mumbai, India is not performing well. Thus in such a situation a multi cap mutual fund tends to be a superior alternative for the mutual fund investor.

Best multicap mutual funds invest in equity shares of varied market capitalisation. Instead of selecting a particular capitalisation, these funds select large cap, mid cap, and small cap shares in the mutual fund portfolio in specific proportions. As equated with only mid cap or small cap funds, the multicap mutual funds are less risky and widespread among mutual fund investors who are less aggressive. The multi cap investments are done in dissimilar proportions to meet the investing objective of the multi cap mutual fund. Mutual funds in other classes like large cap, mid cap, small cap, multi cap, have some limitations which are mandated and are obliged to select the companies that are distinct by their type of portfolios.

A multi cap fund manager is able to freely select stocks from the NSE across capitalisation and sectors as per his viewpoint of the stock market. Hence the mutual fund investor may benefit from rallies in a specific area of the stock market. The fund manager can also decide to allocate investor funds from shares of small cap companies to large cap companies as a defensive technique when he expects lengthy negative scenarios. Therefore, you might occasionally find some amounts of volatility in this type of mutual funds. In multi cap mutual funds managers incline to have large cap bias and keep on changing their mid cap or small cap allocations by a small margin as and when market conditions change.

This type of mutual fund is appropriate for investors with a reasonable risk profile as a multi cap fund is riskier than large cap mutual funds. Over a longer horizon, multi cap funds may be superior creators of wealth than other categories of equity funds since they can take advantage of investment opportunities across shares of various market capitalizations. In addition, returns from multi cap funds are similar to the mid cap type of mutual fund over the long term and also come with lesser volatility.

It is worth noting that Multi Cap Funds earlier had the freedom to invest across market capitalizations and sectors based on the view of the fund manager. However, in September 2020, SEBI had defined a new set of rules for multi-cap funds, which mandated minimum investment of 25% in each market cap segment i.e. Large Cap, Mid Cap and Small Cap.

In order to provide greater flexibility to the AMCs, SEBI via circular dated November 06, 2020 had introduced a new class under equity mutual fund schemes i.e “Flexi Cap Fund”, which is placed as a dynamic equity fund and will not have any limit or bias towards any specific market cap segment. Which means that after re-categorization to Flexi Cap Funds the mutual fund scheme will have the flexibility to capitalise across large cap, mid cap, and small cap stocks in any ratio.

As a mutual funds investor you need to keep your risk appetite, goals and investment horizon in mind. Investors in these funds will have to be ready to assume some risk as this fund invests predominantly in equity instruments. Multi cap funds are an exceptional way to take exposure to various equity segments using systematic investment plan (SIP). Multi cap funds are also suitable for new investors who plan to hedge their risks from large drawdowns in a specific mutual fund cap. The best multi cap funds are capable of harmonizing the volatility and risk very well when it comes to blending the small caps and mid caps in a single mutual fund portfolio and can hope to anticipate the stability that they would receive from a large cap mutual fund.

The information, analysis and opinions expressed herein are for educational purposes only and are not intended to provide specific advice or recommendations for types of mutual fund schemes. This material is not an offer, solicitation or recommendation to purchase any financial products or services or multi cap mutual funds. Always remember that all investments, including multi cap mutual fund investments carry some level of risk, including the potential loss of principal invested.