Why Is It Advisable To Invest In Best Performing Multi Cap Funds

Multi cap funds are diversified equity mutual funds which invest in stocks across the various market capitalization segments. Their portfolio consists of Large-cap, Mid-cap and Small-cap stocks. They are often stated to be market capitalization agnostic. These funds are considered suitable for investors who are in the search for a balanced return and want to make a risk-controlled investment as they are relatively less risky compared to pure Mid-cap or a Small-cap funds. These mutual funds, in the long run, generally perform better across various market conditions, reducing volatility and at the same time giving good alphas (returns) to the investors. The Multi-cap funds are ideal long term investment options for retail mutual fund investors who often lack the professional and technical know-how to understand the different stages of investment cycles.

For the better understanding of investors, new to the dynamic market of Investment, it shall be noted that the Securities Exchange Board of India (SEBI) has clearly distinguished between the various market cap segments on the basis of market capitalization. The top 100 stocks by market capitalization are classified as large caps stocks, the next 150 stocks classified as midcap and the rest are said to be small cap.

The Multi cap funds have the upper-hand in the following areas as compared to a pure mid cap or a small cap fund:

Incorporated risks

The Multi-cap funds are more volatile than Large-cap funds, but less volatile than Mid-cap funds. The Multi-cap funds have a much riskier profile than a Large-cap fund, but at the same time, have a relatively low risk profile as compared to a Mid-cap profile. The risk profile of a Multi-cap fund lies midway between Large-cap funds and Mid-cap funds. However, in the long term, as far as alphas are considered, Multi-cap funds tend to outperform Large-cap funds and can often give returns as high as the Mid-cap funds.

Benefit of diversification

In this rapidly-changing dynamic environment, a change in the marketing conditions may bring gargantuan effect on the value of the investments. In such circumstances, the Multi-cap funds enjoy the benefit of diversification. Mid-cap and small-cap stocks tend to outperform the large cap stocks in bull markets, while Large-cap stocks outperform in volatile markets. In volatile markets or corrections, small cap stocks tend to underperform midcap stocks. From a diversification perspective, multi-cap funds are undoubtedly the truest diversified equity funds.

Flexibility to invest across market cap segments

SEBI, in its mutual fund reclassification circular, has laid out mandates for different equity mutual fund categories. The Large/Mid/Small-cap funds have to invest a specified percentage of their assets in respectively-specified stocks. However, there is no such restriction in the case of multi-cap funds. This flexible mandate of multi-cap funds enable fund managers to exploit attractive opportunities which emerge from time to time, as compared to other equity fund categories which have restricted mandates, and also provide relatively higher stability to investors in highly volatile markets.

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