Equity mutual funds are one of the most popular investment tools in the market today. If you are new to them, you will find your choices lie between deciding between small-cap, mid-cap, large-cap, and multi-cap funds. While large-cap funds offer stability, small-cap funds are popular for their attractive returns.
But, when it comes to diversification and flexibility, nothing beats multi-cap funds. So, what is a multi-cap fund? Learn about this asset class and its benefits in this article.
What are multi-cap funds?
Multi-cap funds are essentially equity funds with holdings in stocks of companies with varying market capitalisation. This means that multi-cap funds consist of a medley of large-cap, mid-cap, and small-cap funds. The proportions depend on the investment approach and objective of the fund.
Large-cap, medium-cap and small-cap funds are bound by the size of companies they can invest in. They have clear mandates that will not allow them to invest in companies outside of their category. For instance, a large-cap fund will not invest in small-cap stocks, even if doing so will result in high returns. Because multi-cap funds have no such restrictions and are able to take advantage of market opportunities, they prove to be better wealth creators.
Additional Read: With the new SEBI rules, are Multi-cap funds worth the risk?
Advantages of multi-cap funds
What are the advantages this mutual fund category offers?
If there is a golden rule of investing, it is diversification. There is no escaping the fact that the stock market fluctuates. Sometimes certain small-cap stocks soar up, and at other times large-cap stocks go down. If you have invested in a fund that only invests in a particular category, market fluctuations can affect your overall returns. Multi-cap funds don’t restrict your investments to companies with a certain market capitalization. Thus, by virtue of a diversified portfolio, you get more of a cushion against market risk with multi-cap funds.
Another advantage of a multi-cap fund is the decent returns (comparable to mid-cap) it offers. If you have a moderate risk appetite and want to invest in the stock market without spending time researching stocks and funds, pick multi-cap funds. These are excellent tools for wealth creation in the long run. You can safely assume that they will give you better returns than large-cap funds, but less than small-cap funds. Thus, by investing in a multi-cap scheme, your portfolio can have exposure to companies of different sizes and can enjoy diversification.
Additional Read: What Is The Power of Compounding & How Can You Use It?
In this article, we’ve answered the question – what are multi-cap funds? Multi-cap funds offer a host of advantages – good returns, diversity, flexibility, and risk mitigation. Choose these funds if you have a moderate risk appetite but want exposure to the stock market.
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