Mutual funds are known to offer capital appreciation over the long term, but they can turn out to be volatile if the individual ends up making the wrong investment. This is the main reason why most financial advisors request investors to first determine their risk appetite, know their investment horizon, understand if the scheme is ideal for their financial goals, and only then invest. What happens is that if you are a first time investor, understanding which mutual fund product is ideal for you can become a tad confusing.
Investors who do not wish to expose their investment sum to the dangers of direct stock investment generally prefer equity mutual funds. But even equity schemes are further subcategorized based on the market cap they have maximum exposure to and hence, sometimes individuals aren’t able to determine whether a large cap, small cap, or a mid cap fund is ideal for them. Such investors can consider diversifying their investment portfolio with a multi cap fund.
What is a multi cap fund?
A multi cap fund is an open ended mutual fund scheme that invests across market capitalization. As per market regulator SEBI regulations, of its total assets a multi cap fund must invest a minimum of 25 percent each in all three asset classes. This means that at least 25 percent in mid cap stocks, 25 percent in small cap stocks, and 25 percent in large cap stocks. The remaining of the portfolio may have exposure to debt or other money market instruments.
Primary benefits of a multi cap fund
Here are some of the key characteristics or primary features of a multi cap fund –
Exposure across market cap
When an investor invests in an equity fund that has maximum exposure to either of the market caps, he or she can only favor the stocks of companies that comprise that particular market cap. Even if that market turns volatile, as per SEBI guidelines the fund must hold minimum exposure of 65 percent to 80 percent in the same market cap. When it comes to a multi cap fund, since this fund can invest in companies across the market capitalization, it may be able to handle volatile markets in a better way.
Generate returns across market cycles
If the large cap market turns volatile, large cap funds will start underperforming and since the fund must have a minimum of 80 percent of portfolio exposure to large cap stocks, the fund manager cannot make any major changes. However, the multi cap fund manager might be able to churn risk adjusted returns across market cycles as this fund invests in all three market caps. Not only do investors get a chance to favor lucrative company stocks, but they are also able to mitigate overall investment risk.
Active portfolio management
The fund manager of a multi cap fund actively manages the scheme’s portfolio. This way, investors do not have to rack their brains in deciding which portfolio of stocks to build. All they have to do is invest in a basket of securities that the fund manager builds using his years of expertise. The fund manager is responsible for actively buying and selling securities and ensuring that the multi cap fund is able to generate returns from time to time.
One of the easiest ways to create long term wealth with multi cap funds is by starting a Systematic Investment Plan (SIP). Investors can invest a sum as low as Rs 500 every month in multi cap funds via SIP. They can even benefit from the power of compounding and rupee cost averaging if they continue investing in multi cap funds via SIP for the long run.