Mutual funds are one of the most popular instruments of investment these days. The reason behind this is two-fold viz. ease of investment and high earning potential. Mutual funds comprise of large-cap, mid-cap, multi-cap and small-cap funds. This post will tell you all about multi-cap mutual funds and its benefits.
Based on market capitalisation, equity mutual funds broadly consist of three categories. These are;
Large-Cap Mutual Funds: These funds invest 65% of their funds into equities of companies that are ranked 1-100 in the stock exchange as per their market capitalisations
Mid-Cap Funds: In these funds, at least 65% of the asset allocation is in equities of companies ranked between 101-250 on the stock exchange as per their market capitalisation.
Small-Cap Fund: These funds invest majorly into companies ranked above 250 in the stock exchange as per their market capitalisation.
Each of these funds carries a different risk-reward ratio. While large-cap funds have comparatively lower return potential than small-cap funds, they are safe to invest. However, there is another type of fund that is quite popular among investors. This is a multi-cap fund.
A multicap mutual fund invests the capital amount between large, mid and small-cap companies. Thus, they are not restricted to invest in a particular market capitalisation fund category. They can diversify their investments across market capitalisations to meet the objectives. These funds carry various benefits.
Diversification is a crucial point of a multicap fund meaning, investment in multicap funds reduces the risk involved considerably than investing primarily in mid and small-cap funds, in the long run.
A fund manager managing a multi-cap fund has the option to keep switching between large, mid and small-cap funds based on market developments and opportunities.
This makes sure that the risk profile of the investment is maintained as desired, and so is the return potential. The manager can also choose to make compromises in earning potential or risks involved based on the status if the market and the investment goal.
For instance, you've invested in a multi-cap fund, which has a tenure of 7 years. In the 4th year, capital appreciation was not as per the expectations set by the fund manager, the reason being unforeseen fluctuations in the market.
The manager can then shift the balance towards mid and small-cap funds that are typically known to result in more capital gains. This will make sure that the long-term goal of the multi-cap fund are maintained by the end of the 7th year. Similarly, in times when the market enters a bearish phase, the fund manager can switch to large-cap funds to add the safety net to the investment.
Multi cap mutual funds are known to offer steady returns for up to 7 years. This is usually less than the ideal tenure for investing in a large-cap fund. It is also more lenient than small-cap funds in which investors usually refrain from investing for a long time, due to its sensitivity to market changes.
This is because multi-cap funds give the investor time to get adjusted to the world of investments and learn about the same. Also, it doesn't require the investor to stay invested for a long time while being relatively safe and secure at the same time. It is thus, more suitable for new investors who are still planning out their finances and their long-term goals. Moreover, it is great for new investors as they don't have to invest in large-cap or mid-cap or small-cap funds separately. The fund managers shift fund allocation as per the market conditions and financial objectives to suit the investor.
Multi-cap mutual funds involve risks like any other investments. The best way to reduce the same is to place your hard-earned money in the hands of a capable fund manager. Make sure to perform a thorough check on the track record of the manager before investing. Also, be very clear on the terms and conditions of the investment, especially on the risks it involves.