How Multicap Funds Work: A Complete Overview
Mutual funds can be an excellent investment avenue for long-term wealth growth, and the most popular of these options are multicap funds. The multi-cap fund invests in a mix of large-cap, mid-cap, and small-cap stocks, which is a diversified portfolio for the investor. The flexibility in a multicap fund allows fund managers to adapt to the changing market conditions, hence enhancing returns while managing the risk. Using a mutual fund app, investors can easily explore and invest in these funds with a few clicks. In this blog, we will look at how multicap funds work, their benefits and risks, and who might consider investing in them.
What are Market Capitalisations?
Market capitalisation refers to the total value of a company's outstanding shares of stock. Companies are classified into three categories based on their market capitalisation:
- Large-cap: These are the biggest companies, often recognised for their stability and reliability.
- Mid-cap: These companies are usually in a growth phase and can offer higher returns than large-cap stocks but come with more risk.
- Small-cap: These are smaller companies that have the potential for significant growth but also carry a higher risk.
How Do Multicap Funds Work?
A multicap fund does not have strict rules on how much to invest in each type of company. However, regulations require that at least 75% of the assets of the fund must be in equity and related instruments. Moreover, a multicap fund must invest at least 25% in each of the three market capitalisation categories, namely large-cap, mid-cap, and small-cap. This provides the fund manager with the flexibility to adjust investments according to market conditions.
Fund managers actively manage these funds. They decide how much to invest in each category based on their analysis of the market. For example:
They would increase investment in mid-cap and small-cap stocks for higher growth potential when the economy is flourishing.
They may shift more funds into large-cap stocks during economic downturns because those are more stable.
Advantages of Multicap Funds
- Diversification: By investing across different sizes of companies, a multicap fund reduces risk. If one sector performs poorly, others may do well, balancing overall returns.
- Flexibility: Fund managers can change the allocation between large, mid, and small caps based on market trends. This adaptability can lead to better performance over time.
- Potential for Higher Returns: Since these funds invest in small and mid-cap stocks, they have the potential for higher returns compared to funds that only focus on large-cap stocks.
- Less Need for Frequent Monitoring: Investors do not need to constantly rebalance their portfolios as the fund manager handles this task.
Risks Involved in Multicap Funds
While multicap funds offer many benefits, they also come with risks:
- Market Volatility: Small and mid-cap stocks are more volatile than large-cap stocks. That is, while there is a possibility of higher returns, there is also a greater chance of loss.
- Manager Performance: The success of a multicap fund depends on the skill of the fund manager. Poor decisions can lead to underperformance.
- Long-term Investment Horizon Required: Investors should ideally have a long-term perspective when investing in these funds. Short-term fluctuations can be significant.
Who Should Invest in Multicap Funds?
A multicap fund can be suitable for various types of investors:
- Moderate Risk Tolerance: If you are comfortable with some level of risk and are looking for growth over time, this type of fund may be appropriate.
- Long-term goals: If you plan to invest for five years or more, you will find it better suited with the funds that can give potential growth.
- Desire for diversification: If you want to invest in various sectors and also companies without actually dealing with the various investments by yourself, a multicap fund would be suitable for you.
Types of Multicap Funds
The types of multicap funds are of many types, which have to be categorised into their respective groups.
- Concentrated Large-Cap Focus: They mainly invest in large-cap stocks but may also hold small and mid-caps as secondary choices.
- Small/Mid-Cap Concentrated Funds: These are more concentrated on small and mid-cap stocks but still hold some amount of large caps.
- Balanced Approach: Some funds try to achieve an equal distribution across all three categories, thereby diversifying but managing the risk.
Conclusion
A multicap fund offers investors exposure to a vast pool of companies, spreading it across different sizes of capitalisation. It represents stability from large caps to the growth potential of midcaps and small caps. Diversification and high returns are the opportunities. In return, the risk will be there, which one needs to understand and take that much investment if their goals are in line. If you are looking for a balanced approach to equity investment while managing risk effectively, then investing in a multicap fund could be the right choice for you. Always consider your risk tolerance and investment horizon before making any decisions.
