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: ₹2,00,000 (20% of the corpus)
- Other investments: ₹1,00,000 (10% of the corpus)
The advantages of investing in multi-cap funds:
- Diversification: Multi-cap funds invest in companies of various sizes and sectors, thereby reducing the impact of market fluctuations on the overall portfolio.
- Flexibility: Multi-cap funds provide the fund manager with the flexibility to adjust the portfolio’s allocation based on market conditions.
- 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.
- Opportunity to benefit from market trends: Multi-cap funds can adjust their allocation accordingly to benefit from prevailing market trends.
- 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.