The Indian mutual fund industry offers a wide array of options to investors. Thus, investors often face a dilemma of whether they should invest in special funds with a focus on a specific segment of the market (such as large-cap, mid-cap, small-cap, and so on) or invest in funds that cover investments in different categories. This is where multi-cap funds come in. In this blog, we will explore the advantages of investing in multi-cap funds.
What are Multi-Cap Funds?
Multi-cap funds are Equity Mutual funds that diversify their investments among companies that have different market capitalization (large-cap, mid-cap, and small-cap), all within a single portfolio. It is an in-built diversification strategy that assists in creating a balance between growth potential and sustainability in the long term.
Multi-cap funds also reduce the risk of market fluctuations by investing across various market capitalizations; hence, Multi-cap funds are an attractive alternative to long-term investors seeking flexibility in addition to performance.
The Securities and Exchange Board of India (SEBI) directs that multi-cap funds should allocate a minimum of 25% of the total fund assets towards each large-cap, mid-cap, and small-cap segmentation. The remaining 25% (a balance of the fund) can, however, be invested by choice of the fund manager, based on the current market conditions, emerging opportunities, or economic landscape. This structured allocation ensures a balanced approach to diversification. Nippon India Multi Cap Fund, Kotak Multicap Fund, and ICICI Prudential Multicap Fund are some of the popular multicap funds.
Benefits of a Broader Multi-Cap Strategy
Some benefits of investing in multi-cap funds are mentioned below:
Diversification
Intrinsic diversification is one of the main benefits of investing in multi-cap funds. These funds spread their risk and reduce the impact of a single stock or industry’s poor performance on the portfolio as a whole by investing in a variety of stocks spanning across various market sectors.
Professional Management
Multi-cap funds are managed by professional fund managers who have years of experience in the Indian mutual fund industry, and they consistently monitor the market to capitalize on the emerging opportunities, make timely decisions, and rebalance the portfolio to adapt to economic changes or new opportunities.
Adaptability and Flexibility
Multi-cap funds are versatile and possess the flexibility to adapt to evolving market conditions. Fund managers can rebalance the portfolio among various categories depending on their assessment of market risks and opportunities. This flexibility enables them to take advantage of the best opportunities present in various market segments, resulting in higher returns.
Suitability for Long-Term Goals
The multi-cap funds have become a popular option among investors who have a medium-term to long-term investment perspective of approximately three to five years or beyond. This long-term orientation allows investors to withstand market fluctuations and maximize returns on investments due to the equity nature of the fund. This makes them a perfect option for investors looking to create wealth in the long term.
Risks and Considerations
Although multi-cap funds have many benefits, they are not completely independent of the broader market movements as they are equity-based investments. Their returns can be affected by economic downturns, political events, or global trends.
Adding mid and small-cap stocks adds a layer of price volatility since these stocks can experience sharp ups and downs over short periods. The performance of the fund is also dependent on the experience of the fund manager, the judgment, and the timing of the asset allocation.
Conclusion
Mult-cap funds provide a broad diversified strategy because of diversification, risk vs. return balance, and professional management. Although multi-cap funds are also associated with some risks, their wide-ranging exposure to various market caps allows investors to overcome market fluctuations and achieve consistent returns over the long term.