After the introduction of the new categorization of mutual funds [MFs] by the Securities and Exchange Board of India [SEBI], Multicap Funds are defined as equity funds that can invest across market capitalization. These funds should invest at least 65% in equity and equity related instruments. The portfolio of such funds can comprise of large-cap, mid-cap as well as small-cap stocks. Multicap funds have been gaining in popularity of late due to their performance.
Multicap funds for investors
When you think of investing in an equity fund, you should consider multi-cap funds. Here are some reasons why multicap funds are recommended to investors:
- No need to understand valuations: Some investors find it difficult to grasp valuations of various capitalizations like mid, small or large and it is problematic for them to decide on which will do better in the future. Investing in multicap funds eliminates the need to choose the right capitalization.
- Professional expertise: In a multicap fund, a dedicated fund manager can shift holdings from one capitalization to another depending on market outlook. As an example, if valuations of mid and small cap companies turn expensive, the fund manager can shift the holdings to large caps, and vice versa.
- Fewer constraints: Multicap fund managers have greater freedom in managing the fund’s portfolio. For example, in a pure large cap fund, it is a requirement that 80% of the portfolio be allocated to top 100 stocks by market capitalization; mid-cap funds need to have 65% of the corpus in stocks listed between 101-250 in terms of market capitalization. In a multicap fund, a fund manager is free to pursue the best pickings and create a mixed portfolio without any market cap bias.
Risks attached to multicap funds
All investments carry some risks and so do multicap funds. Since mid-cap and small cap funds carry more risk than large cap funds, the risks of mid cap and small cap funds are in part inherited by multicap funds. However, in a good economic environment, the fund manager can invest in small and mid-cap segments while shifting to large caps during periods of downturn.
Who are multicap funds good for?
Multicap funds are good for long-term investors who have an investment horizon of above 10 years. These funds can help in wealth building, planning for retirement and achieving long-term financial goals like purchase of a house or education funding. This type of equity fund uses a dynamic investment strategy to accumulate gains over different market cycles. Here is a snapshot of their performance
A Systematic Investment Plan [SIP] in a multicap fund can help you build a comfortable corpus through consistent investments over the long term. Investors who do not want to get into the nitty-gritty of stock selection or sifting through market capitalization may find these funds ideal.