Advantages of investing in a multi-cap fund

Investments are often differentiated based on the market capitalization of companies. Small-cap funds focus on investing in smaller companies with a lower market capitalization, mid-cap funds invest in medium-sized companies, and large-cap funds invest in established, large-scale companies. On the other hand, multi-cap funds offer a diversified approach, giving investors the flexibility to invest across various market capitalizations. Read this article to know the advantages of investing in multi-cap mutual funds.

What are multi-cap funds?

Multi-cap funds are mutual funds that invest in companies of different market capitalizations, including small-cap, mid-cap, and large-cap stocks. The allocation of investments across these stocks is based on the fund manager’s evaluation of market conditions and opportunities. This diversification enables multi-cap funds to take advantage of opportunities available across the market spectrum. For example, a multi-cap fund with a total corpus of ₹ 10,00,000 could be considered. The fund manager can allocate the investment as follows:

  • Large-cap stocks: ₹4,00,000 (40% of the corpus)
  • Mid-cap stocks: ₹3,00,000 (30% of the corpus)
  • Small-cap stocks: ₹3,00,000 (30% of the corpus) 

As per the SEBI (Securities and Exchange Board of India) mandate, multi cap funds need to have a minimum of 25% allocated in each of the large-cap, mid-cap, and small-cap stocks. Beyond this mandated allocation, the fund manager has the flexibility to distribute the money across the market capitalizations. Multi-cap funds can offer a blend of all capital markets, potentially allowing investors to strike a balance between the risks and returns.

So, investors with a moderate risk appetite who are aiming for wealth creation over the long-term can consider multi-cap mutual funds since these funds offer diversification when it comes to making investments in the equity markets. 

The advantages of investing in multi-cap funds:

  1. Diversification: Multi-cap funds invest in companies of various sizes and sectors, thereby reducing the impact of market fluctuations on the overall portfolio.
  2. Flexibility: Multi-cap funds provide the fund manager with the flexibility to adjust the portfolio’s allocation based on market conditions.
  3. Potential for higher returns: Multi-cap funds have the potential to deliver attractive returns over the long term. They can capture the growth potential of mid-cap and small-cap companies while benefiting from the stability of large-cap stocks.
  4. Opportunity to benefit from market trends: Multi-cap funds can adjust their allocation accordingly to benefit from prevailing market trends.
  5. Risk mitigation: By investing in a mix of market capitalizations, multi-cap funds can reduce the impact of a downturn in any particular segment of the market on the overall portfolio.

Since the fund manager plays a major role in taking investment decisions for multi-cap mutual funds, you must analyse the fund manager’s previous performance before investing in a multi-cap fund. Since capital gains apply to returns earned through multi-cap funds, you must assess the long- and/or short-term capital gains taxes that could be applicable before investing.