Are Multi-Cap Mutual Funds a good investment?

If you ever ask a regular investor about the best way of investing, which can ensure optimum returns at reasonable risk, their answer will never be putting all the wealth in one equity. Instead, it is highly likely that they would recommend holding a diversified portfolio of securities.

The reason behind this is that a diversified investment will help with reducing the risk factor. And honestly who likes taking risks, right? So the rational decision will be to go for diversified investments.

Multi-cap mutual funds make the work easy for you. As an investor, you won't have to go around buying shares of different firms; instead, enjoy the advantage of a diversified portfolio by simply investing in a multi-cap mutual fund. Wondering how it's the same situation? Let's find out.

What are Multi-Cap Mutual Funds?

The term "Multi-Cap Mutual Funds" if dissected gives the entire meaning. It is a mutual fund that invests in multi-cap firms. Multi-cap firms refer to large-cap, mid-cap funds, and small-cap firms.

Want to know more about the different types of mutual funds? Click here to read more on large-cap, mid-cap, and small-cap mutual funds.

With large-cap, small-cap, or mid-cap mutual funds, the investment opportunities are limited to the respective firms. Whereas with a multi-cap fund, the fund manager distributes the wealth in all three types of firms.

Isn't it a better option than being restricted to one type of market capitalization?

This investment flexibility also enables the fund manager to freely invest in the entire market whenever a good opportunity arises. All this diversification also checks off the most common needs in an investor's Investment Policy Statement (IPS), and that is, better returns with less volatility risk.

Types of Multi cap Mutual Funds

Even though a multi-cap mutual fund in itself has diversification, it also gives a choice to investors regarding what type of multi-cap fund they want to invest in.

1. No specific market capitalization: In this, there is no specification regarding market capitalization. The basic focus is on investing in securities that can outperform the benchmark or market.
2. Mid/Small-Cap focused: The main focus is on mid-cap and small-cap firms, that is a bigger proportion of the wealth is invested in such firms. The large-cap firms are there to cushion any downside risk.
3. Large-Cap focused: The bigger proportion of the fund is invested in large-cap firms. In this, the only reason for investing in mid/small cap firms is to take benefit of any opportunity that may lead to better returns.

Who should invest?

The investors who match with the optimum return for less volatility characteristic of multi-cap schemes are the moderate risk-takers.

It is also ideal for investors who don't want to be part of the hassle that comes with searching for the right firm to invest in.

Why should you invest in Multi-cap Mutual Funds?

Every investor has one basic need when it comes to investing, and that is wealth creation. So let's consider the return perspective to understand the reason.

Since the portfolio will be a diversified one with investments in firms of different market cap, the returns are stable in most economic conditions. During a bullish market, the mid and small-cap firms will provide significant returns. And at the time of a bearish market, the large-cap will be there to cushion the downtrend of the other two sectors.

Investors who are ready to take a moderate amount of risk prefer multi-cap mutual funds.

Risks related to multi-cap funds

Multi-cap may be a rewarding investment, but we all know that there is no investment without risk. The risk associated with this fund is that at times it may prove to be a bit volatile. The reason behind this volatility is that with ups and downs in the market trend, the fund managers keep changing the weightage of the fund invested in the stocks.

When bullish, more exposure is taken in mid-cap firms, and during a bearish market, the fund managers take funds out of the mid and small-cap firms and transfer them to large-cap firms.

Also, in terms of risk, multi-cap mutual funds are riskier compared to large-cap mutual funds as they invest only in large-cap firms.

Factors to consider before investing

If after reading all the pros and cons of the multi-cap mutual funds, you find yourself inclined towards investing in these schemes, then the next head will be of real help to you.

No matter how much you trust the fund house, do not invest blindly. Make sure to do your share of evaluation of the fund and the related factors.

Fund performance: The first step towards making an evaluation is to check the annualized return for at least a period of 5-10 years of the selected funds. Another way to check the fund's performance is to compare its return against a benchmark market index.

Portfolio diversification: Check to see that the fund portfolio has proper diversification, with investments in different market caps and sectors. For example, the fund manager may forecast that the pharma sector will do well in the future, so they invest the majority of the corpus in large-cap, mid-cap, and small-cap stocks of firms from this particular stock. This will increase risk exposure towards a single sector.

Past performance of the fund manager: Checking the previous performance of the fund manager will give an idea of whether they can effectively handle the fund or not and whether they can recognize opportunities and invest accordingly. Checking past performance will also help in understanding how the manager handles extreme economic conditions.

It is highly recommended to check these factors before investing in these schemes. Multi-cap funds may provide returns but also make sure to align your other needs such as investment horizon, financial objectives, risk tolerance, etc.

Recent Update on Multi-cap Fund Investment

Recently in September 2020, SEBI made it mandatory for the multi-cap schemes to have a minimum investment of 25% in each large-cap, small-cap, and mid-cap firm. This action was taken because most of these schemes were investing most (around 75%) of the corpus in large-cap firms. The exposure to mid and small-cap firms was very less.

SEBI took the step to make sure that mid and small-cap are also able to raise more capital. But the fund managers seem against this because it will raise the risk factor associated with multi-cap mutual funds which are not exactly what moderate risk takers prefer.

The fund institutions have still not settled on their new strategies according to the changed guidelines. They have until February to finalize everything. Now it's up to investors whether they want to continue with multi-cap mutual funds or want to withdraw and find other suitable investment instruments.

Click here to read more about SEBI's new norm on multi-cap mutual funds.

Best Multi cap funds

1. Parag Parikh Long Term Equity Fund.
2. Invesco India Contra Fund.
3. Mirae Assets Focused Funds.
4. Axis Multicap Funds.
5. Kotak Standard Multicap Fund.

Closing statement

With this new development in the multi-cap scheme, the risk factor may arise compared to the past fund strategies. So if the risk is the major factor around which your investment decision revolves, you might want to change from multi-cap to large-cap funds or some other arbitrage or liquid fund.

But, if wealth creation is also what you look for in investments, then multi-cap mutual funds can be a good choice as it does have a reputation of steady returns.

The facts are open now, it is up to you, as investors, to decide which investment instrument is more attractive.