When it comes to equity investing, choosing the right category of mutual funds can be crucial in achieving long-term financial goals. Among various fund types, multi-cap funds have emerged as a balanced and versatile option for investors who seek exposure to both mid and small-cap stocks while maintaining the stability that large-cap stocks offer. Multi-cap funds invest across companies of different market capitalizations large, mid, and small thus creating a diversified portfolio.

Here’s why multi-cap funds may be the best way to invest in mid and small-cap stocks.

– Purpose for investing in Multi cap fund.

1. Capital Growth: Multi Cap Funds target capital growth by identifying opportunities across the entire market spectrum. The flexibility in choosing stocks allows them to capture potential returns in various market segments.

2. Risk Mitigation: Diversification across market caps helps in spreading risk. While large-cap stocks provide stability, mid and small-cap stocks bring growth potential. This balanced approach seeks to mitigate the impact of volatility.

– Key Components of Multi Cap Funds:

1. Diversification Across Market Capitalization:

One of the standout features of multi-cap funds is their diversification across large, mid, and small-cap stocks. While investing solely in mid or small-cap funds can offer potentially higher returns, these segments are often more volatile and can suffer during periods of market downturns. Multi-cap funds, however, provide a cushion by including a healthy proportion of large-cap stocks, which are typically more stable.

2. Flexibility for Fund Managers:

In multi-cap funds, fund managers have the freedom to adjust the portfolio allocation based on prevailing market conditions. This flexibility allows them to shift between large, mid, and small-cap stocks to optimize returns.

For example, when the economic outlook is uncertain, the fund manager can increase the allocation to large-cap stocks to preserve capital. Conversely, when the market environment is more favourable for mid and small-cap stocks, the manager can tilt the portfolio towards these segments to capitalize on potential growth. This dynamic approach makes multi-cap funds more resilient and adaptable to different market cycles compared to pure mid or small-cap funds, where managers are constrained by the fund’s mandate.

3. Risk Adjusted Return:

While mid and small-cap stocks introduce some level of risk, the presence of large-cap stocks provides stability. This balanced approach aims to balance risk and return, making Multi Cap Funds suitable for investors with varying risk tolerances.

4. Flexibility:

Multi-cap funds are not restricted to a specific segment of the market. This flexibility allows fund managers to shift investments between large, mid, and small-cap stocks based on market conditions, enhancing the potential for returns and mitigating risks.

5. Balanced Exposure:

These funds offer exposure to all segments of the market ensuring that investors don’t miss out on growth opportunities in any sector.

Let’s see the comparison of Mid Cap, Multi Cap & Small Cap funds performance over the different period of time span.

The Above tables indicate the returns & the standard deviation Mid cap, Multi Cap & Small cap top funds within the category. All these funds are good enough as they are beating their Category Average returns in the different time horizon. As the Small caps & Mid-caps provide healthy returns to the investors but still, they are exposed to the market volatility. As you can see the most of the funds are having standard deviation more than 1 meaning they are more volatile to markets up’s & downs.

On the other hand, Multi cap funds are required to hold at least 75% of their assets in equity and equity related instruments at any point in time. The portfolio must allocate at least 25% of its assets to large-cap stocks, 25% to mid-cap stocks, and another 25% to small-cap stocks this provide them the diversification across the market caps in the portfolios. As we can see multi caps funds have lesser returns as compared to the mid & small cap funds but they are less volatile to the market’s ups & downs as most of the fund indicates SD less than 1.

Who Should Invest in Multi Cap Fund?

1.First Time Investors:

Multi cap funds due to their diversified portfolio are ideal for first-time equity investors as it keeps the risk in control. Also, since these investors might not be aware of the risks that come with investing in companies of a specific size, a multi cap fund is the best bet for them.

2. Investors in a dilemma:

A lot of investors get confused about whether they should go for funds that invest in big companies for their relative stability or go for mid and small caps which can give high growth but come with risk. Multi cap funds solve that problem.

3. Investors with a Long-Term Investment Horizon:

While investing in any equity funds, the investment horizon should be a long one. So, if you are an investor, who has a long-term financial goal in mind like early retirement, children’s education, building a house, etc. investment in a multi cap fund can help in fulfilling your goals. An investment horizon of more than 5 years is required while investing in these funds. A long horizon acts as a cushion against the volatility of equity markets and also helps you reap the benefits of compounding.

4. Investors who want exposure to mid and small caps without taking too much risk:

Some investors don’t want to miss the growth opportunities that mid cap and small cap funds offer, but they also don’t want to take risk or are not comfortable with the volatility they might see if they invest in fund investing only in small or mid-caps.

Conclusion

Multi-cap funds offer a smart, balanced approach to investing in mid and small-cap companies. By providing a mix of stability and growth, they allow investors to participate in the wealth creation potential of high-growth sectors without exposing themselves to excessive risk. For those with a long-term perspective and moderate risk appetite, multi-cap funds can be an excellent addition to a well-rounded portfolio.

To understand more on the topic as well as to start investments please feel free to contact us:

Phone: +91-9324609115

E-mail: team@richvikwealth.in

The article is authored by Mr. Saurabh Gosavi from Team RichVik.