Multi-cap equity funds are mutual funds that focus on all sectors and capitalization rather than a particular one. And this is what makes them more diverse and provides balanced disclosure to all sizes of company stocks. Also, it ended the need for investors to invest in funds of different caps by allocating funds to all capitalization equities.
Moreover, If you invest in any single-cap fund, the fund managers are restricted to investing in that fund. Thus Multi-cap funds are considered best to maximize wealth creation as it allows fund managers to invest across the different sectors of the market. And, every investor funds multi-cap investment to fit his financial needs.
So, this article will discuss multi-cap funds and factors you should consider before investing.
How do Multi-cap Funds Work?
Security and Exchange Board of India mandates that all mutual fund investment stick to the stocks determined for their portfolios. While all other funds are restricted to their specific stocks, multi-cap funds can invest 25% of the allocation in each equity. And this allows multi-cap funds to grab the opportunity for stability and potential growth.
Likewise, this opportunity reduces the chances of risk to a certain extent, as they can be less affected by market fluctuations by investing in large-cap funds. On the other hand, when the economy expands, they can take advantage and make high returns.
Types of Multi-Cap Funds
I. Multi-cap Funds Targeting Large-Cap Funds
At the time of the downfall in the market, multi-cap funds focused more on large-cap funds and allocated more than 25% of assets to them. And this investment strategy provides stability and balance to multi-cap investors and secures their portfolios at the time of adverse market conditions.
II. Multi-Cap Funds Targeting Small/Mid-Cap Funds
These multi-cap funds focus more on yielding higher returns and potential outgrowth; they invest more than 25% in small/mid-cap equities. And multi-cap fund managers use this investment strategy at the time of expansion in the economy and growth in financial markets.
III. Multi-Cap Funds with no Specific Target
Besides focusing and mandatorily investing 25% in the asset of each capitalization, these funds do not target any specific equity. Instead, fund managers focus more on the stocks expected to outperform.
Benefits of Investing in Multi-cap Funds
a. Portfolio According to the Prevailing Market Conditions
The flexibility of multi-cap funds allows changing the composition of the portfolio according to the prevailing market conditions. For instance, if market conditions overvalue the small/mid-cap funds, the fund managers can go for large-cap for stability and defense.
b. Diversification in Portfolio
Multi-cap funds allow you to invest across various assets, and the company size does not restrict fund managers, and they can invest in the stocks that best meet investment goals. Also, it will diversify your portfolio and provide both stability and potential growth.
c. Disclosure to All Sectors of the Economy
Since multi-cap funds are not restricted to any specific sector, you will get exposure to different sectors of the economy and never miss out on any opportunity available in the Indian market with minimum risk factors.
Things to Consider Before Investing in Multi-cap Funds
Multi-cap funds invest in equities of diverse market capitalization, and fund managers seek the opportunity to maximize their profit and achieve their investment goal. Therefore, fund managers play a very important role in the success of any scheme. Hence it is important to know about the past performance of your fund manager in all market conditions.
● Expense Ratio
Before investing, knowing the expense ratio to maximize your profit is important. In order to manage your funds, management companies charge you an amount called an expense ratio. Therefore, you should opt for a low-expense ratio scheme for better returns.
● Financial Goals
Before investing in multi-cap funds, you must keep your financial goals in mind, whether you want to achieve short-term or long-term objectives. Also, ensure that you prefer stability or higher returns to get the best investment instrument to meet your financial objectives.
In conclusion, multi-funds stand out due to their diversification and flexibility. For instance, if you want to invest in mid-cap funds, you have to be patient and stay invested in medium-sized stocks even if the market underperforms. Similarly, if you are invested in large-cap funds, you can’t utilize the potential of small/mid-cap companies when the market condition is favorable. However, multi-cap funds offer you the opportunity to yield high returns with stability.