Multicap funds have the advantage of flexibility

After the re-categorisation of mutual funds by market regulator SEBI, many advisors are recommending the multicap fund category to investors.

What are multicap funds?
These are diversified mutual funds which can invest in stocks across a range of market capitalisations. As per regulatory mandate, these funds need to have a minimum investment in equity and equity related instruments of 65%. Their portfolio comprises of large-cap, mid-cap and small-cap stocks. They maintain an extensively diversified portfolio of stocks.


What is the advantage of investing in multicap funds?
Investors do not know whether large, mid or small cap funds will do well. Multicap funds give the flexibility to fund managers to keep switching holdings in the fund between large-, mid- and small-cap stocks as they deem fit, based on their outlook for the market. For example, when valuations in the midand small-cap spaces turn expensive, the fund manager will move to large-cap stocks and vice versa. Compared to this, a pure large cap fund needs to have minimum 80% of the portfolio in the top 100 stocks by market capitalisation, or a mid cap fund needs to have 65% of the corpus in stocks with market capitalisation ranked from 101-250. Over the long term, this category of funds carries lower risk as compared to pure mid cap/small cap funds.

Who should invest in multicap funds?
Investors who don’t want to get into the nuances of picking individual stocks or deciding which market capitalisation fund would suit them may go for multicap funds to start with. Once they are sure of a category, they could even switch to those funds. Investors who want to balance risk and volatility in a single portfolio could also opt for multicap funds. This category of fund suits those with a moderate risk appetite. Multicap funds can be ideal wealth creators as compared to plain large cap funds. Because of their dynamic investment strategy, these funds may deliver better returns for achieving long-term financial goals like retirement or higher education. Investors looking to stagger their investments through systematic investment plans (SIP) could also look to using this category of funds.

What time horizon should investors look at?
As with any equity product, investors should look to invest for a time frame of at least five years. This helps them even out volatility and benefit from compounding.