What is Multicap fund & its Advantages

If you know exactly how much corpus you want to accumulate then you don’t have to think too much when making an investment decision. Financial planning is as important as investment planning. People often rely on conservative avenues to achieve their financial goals. But looking at the current interest rate scenario, it is less likely for anyone to achieve what they have hoped for. During times interest rates are all time low in India, some people are switching to mutual fund investments. Mutual funds are a pool of professionally managed funds that offer long term capital appreciation.

And those who wish to invest in a mutual fund scheme that spreads its portfolio across market capitalizations, such individuals may consider investing in market linked schemes like multicap funds.

What is a multicap fund?

Mutual funds can be largely categorized as equity, debt, and hybrid funds. Multicap funds fall under the equity schemes gamut. A multicap fund is an open ended mutual fund scheme that invests the majority of the investible corpus in equity and equity related instruments of small cap, mid cap and large cap companies. Of its total assets, a multicap fund must invest a minimum of 25 percent each in stocks of mid, small, and large cap companies.

What are the advantages of multi cap funds?

They deal with market volatility in a better way – While other equity funds are confined to having maximum exposure of their portfolio to a select market cap, multi cap fund managers have the leeway to diversify their portfolio across companies belonging to various sectors and industries. For example, if the large cap market turns volatile, the fund managers of bluechip funds/large cap funds have no option but to still have a minimum of 65 percent exposure to large cap stocks. Or even if some other market cap seems lucrative, the fund manager still cannot reduce the exposure and take advantage of such a situation. However, a multicap fund may be able to perform better in more such scenarios. That’s because only 25 of the multicap portfolio is exposed to large cap and tomorrow if any other market cap seems to outperform the multicap fund manager can expose the remaining 25 percent of the portfolio that market as well.

Professional fund management – Multicap funds are managed by a professional team of fund managers. Hence, even those investors who do not possess a deeper understanding of the equity markets can earn decent returns by investing in multicap funds. The fund managers use their years’ worth of experience in selecting the potential stocks, thus building a solid return-reaping portfolio.

They offer true diversification – While other types of equity funds have maximum exposure to any one market cap, multicap funds diversify their portfolio by investing in stocks of companies belonging to various sectors and industries spread across the mid cap, large cap as well as the small cap market cap. By investing in all three market caps, these funds balance the portfolio’s overall risk. While mid cap and large cap markets prove to be rewarding during bullish markets, they can even offer downside protection when markets turn bearish. Small cap stocks are the ones with the highest amount of volatility but are known to offer the highest returns as well.

A multicap mutual fund scheme may hold the potential to offer investors decent returns, but they do not guarantee capital appreciation. Hence, investors must consult their financial advisor before investing.