Spreading your investments across different types of assets is one of the golden rules of investing. Putting your money into stocks of companies with various market values and business sectors makes your portfolio less risky overall and less likely to take a significant hit during market downturns.
At the same time, a diverse mix of investments allows some assets to do well when others flounder, smoothing out returns over time. In this blog, we will discuss the merits of multi cap funds and how they can benefit investors.
The Scope of Multi Cap Funds
Multi cap funds provide exposure to companies of all sizes. They invest a minimum of 25% each in large, mid, and small cap stocks, providing participation across market segments. The fund manager decides the allocation between market caps based on prevailing valuations and growth prospects.
Additionally, they invest across sectors to create a diversified portfolio of stocks spread across market cycles. Their flexibility in allocation helps capitalise on opportunities across market environments.
Benefits of Investing in Multi Cap Funds
Mentioned below are some of the benefits you get when you invest in multi cap fund:
1. Enhanced Diversification
The primary benefit of multi cap funds is diversification across market caps and sectors. By investing in a single fund, investors gain exposure to a basket of stocks that would otherwise require multiple funds. This diversification cushions against company—or sector-specific risks.
2. Flexibility in Asset Allocation
Since multi cap funds dynamically shift their allocation between large, mid, and small caps, they may capitalise on segments offering better risk-reward prospects. For instance, a higher mid-cap allocation in periods of expansion and a higher large-cap stance in uncertain times. This flexibility enables superior risk-adjusted returns.
3. Exposure to Different Market Segments
Multi cap funds let you invest in companies of all sizes, unlike those that focus on large or mid-sized companies. This gives you exposure across the entire market, not just specific segments. Exposure across market caps results in balanced portfolios that can harness opportunities provided by companies regardless of their size.
4. Potential for Balanced Returns
The diversification inherent in multi cap funds has the potential for balanced returns through market cycles. By not being overly exposed to any single market segment, these funds aim to generate consistent returns in line with their benchmark across different market environments.
5. Suitable for Various Investment Horizons
The dynamic allocation of multi cap funds may make them suitable for long, medium, and short-term horizons. Investors with a sufficiently long horizon can benefit from small and mid-cap exposure, while medium-term investors can gain from tactical calls on market caps.
6. Adaptability to Market Changes
Since fund managers of multi cap funds have the leeway to change their exposure based on prevailing market dynamics, these funds can swiftly respond to evolving conditions. For instance, they can increase their mid-cap exposure after a market correction when the segment becomes attractive from a valuation perspective.
7. Reduced Volatility Through Diversification
With well-diversified portfolios spread across market segments and sectors, multi cap funds experience lower volatility than undiversified funds. This makes them more suitable for investors with lower risk tolerance.
8. Broad Investment Opportunities
Multi cap funds provide a simple, low-cost way for investors to gain exposure across market caps and sectors through a single fund instead of multiple funds. This provides participation in India’s equity growth story at large.
Conclusion
Multi cap funds provide investors with a diversified portfolio comprising companies across market capitalisations and sectors. Their dynamic style of investing, flexibility in allocation, and balanced exposure make them attractive across market cycles and investment horizons. For investors seeking diversification along with the growth potential of Indian equities, multi cap funds make compelling investments.
