One of the preferred investment options for Indians is mutual funds. They are investment schemes through which an AMC collects money from a group of investors and pools them into a fund. Once enough money is collected in the fund, it is used to purchase different kinds of financial securities. These funds are known for offering a wide range of facilities such as professional help, wherein your portfolio is managed by a fund manager. Apart from professional help, mutual funds are not a monolith. In fact, there are numerous variants of mutual funds that are available as an investment option.
One of these types of mutual funds is equity funds. As the name suggests, this variant of the mutual fund is known for investing directly in equities. But, just like is the case for mutual funds, equity funds also have different variants of their own. One of these different variants is multi-cap funds.
What are multi-cap funds?
One of the different types of equity fund, multi-cap funds are known for allocating funds primarily in stocks across small-, mid-, and large-cap companies. Based on the market conditions, a fund manager takes the decision on making the predominant investments. The minimum exposure of these funds to multi-cap stocks is 65% of the total assets.
Moreover, while large-cap funds, another variant of equity funds are known for providing better stability to a mutual fund portfolio, mid-cap, and small-cap funds (which are also other equity fund variants) provide investors with exceptionally high returns. Funds based on sectors can fetch gains if a particular sector is performing exceptionally well. However, what makes multi-cap funds stand out is that they come with considerable flexibility. That’s because multi-cap funds diversify their investments in stocks of companies with different market capitalisations. Investments are carried out in varying proportions to meet the investment objective of the fund.
What are the different risks associated with multi-cap funds?
As these investment schemes are known for investing in stocks of all kinds of market capitalisation businesses including mid-cap and small-cap stocks, multi-cap funds are considered riskier than large-cap schemes that allocate funds mostly to large companies. In a robust economy, the fund manager of a multi-cap fund can increase exposure to mid and small-sized companies to benefit from earnings.
Sometimes, the fund manager can also choose to move the investor’s money from shares of mid-cap and small-cap companies to large-cap companies. This action can be taken to take shelter whenever the expects prolonged period of market volatility. Hence these funds are known for coming with a high degree of market volatility.
What to do before opting for a multi-cap equity fund?
As multi-cap funds are known for allocating funds across different market caps, the role of the fund manager is very critical in determining the performance of the fund. Before signing up for a multi-cap fund, it is prudent to check things like the long-term performance of the fund and the fund manager’s past record. While checking the long-term performance, you need to check for things like three-year and five-year annualized returns, portfolio concentration, and volatility.
Apart from checking past performance and the fund manager’s history, it is also imperative to regularly check the portfolio this fund has invested in. As this variant of equity funds is not limited to investing in any specific market, it is better for an investor to have a look into the trends of different sectors as there might be some sectors that one should avoid sometimes. Regularly checking the portfolio might also help you take important decisions.
Who are multi-caps suitable for?
Multicap funds are an ideal solution for aggressive investors. Those investors are the type of investors who are okay with taking risks to reach their long-term goals.