Mutual funds can be broadly categorized as equity and debt funds. Even under equity and debt, there are various sub-categories. For example, investors who wish to diversify their portfolio with debt funds may consider liquid funds, ultra short-term funds, long-duration funds, gilt funds, etc. On the other hand, under the equity funds, there are options like small cap, mid-cap, large cap, ELSS, Flexi cap, etc. Investors who are new to equity mutual funds and aren’t sure whether they must invest in mid-cap, small-cap, or large-cap funds may consider multi-cap funds.
The reason is, multi cap funds offer a well-diversified portfolio that is spread across market capitalization. Let us find out more about multicap funds and some of their features.
What is a multi cap fund?
Before we start with multi cap funds, do understand that the word ‘cap’ in mutual fund terms refers to capitalization. The market capitalization of a company is the market value of a company’s outstanding shares, its worth. A multi cap fund is an open ended scheme that spreads its portfolio across large cap, mid cap, and small cap company stocks. As per market regulator SEBI guidelines, of its total assets a multi cap fund must invest a minimum of 25 percent each in the mid cap, large cap, and small cap company stocks.
Features of a multi cap fund
True diversification
Yes, it is true that other equity funds invest in a basket of securities too, but none of them offer diversification like multi cap funds. Multi cap funds spread their portfolio across companies belonging to various sectors, industries, and market capitalization. But in the case of other equity schemes like a mid-cap or a small-cap fund, they must expose a maximum portion of their portfolio to a certain market cap. So even if that market cap is in turmoil, the fund manager cannot shift the portfolio composition and is confined to investing the majority of its assets in one market cap. In such a market scenario, multi cap funds might be able to deliver better than other schemes.
Ideal for long term goals
Some investors fear investing in equity market-linked schemes like multi cap funds because they fear that they lose their money to market volatility. However, what people do not realize is that although equity markets are volatile in the short run, they have always corrected and delivered decent returns in the long run. If you are investing in multi cap funds, ensure that you have a long-term investment horizon spanning over five years or more. Also, if you invest in this scheme for an even longer duration you might be able to accumulate a commendable corpus for long term goals like retirement planning, buying a new house, securing your child’s financial future, etc.
Ideal for investors with a very high risk appetite
Although multi cap funds can generate capital appreciation over the long term, they carry a risky portfolio. These funds invest a minimum of 75 percent of their total assets in the equity market. Also, just like any other mutual fund scheme, multi cap funds do not guarantee returns. Hence, only investors with a very high-risk tolerance should consider investing in multi cap funds.
A well-diversified portfolio can mitigate the overall investment risk and allow the scheme to deliver in the long run. That’s exactly what multi cap funds offer and investors can make a one-time investment or start a monthly SIP in these funds.
