Multi-cap funds: What are they and how do they work

If you are confused about which market capitalisation to invest in when it comes to mutual fund schemes, then multi-cap mutual funds are for you. According to SEBI, the 75% of a multi-cap mutual fund’s total investments should be in stocks and other instruments related to stocks. This limit is further subdivided based on market capitalisation.
In a Multi-Cap Fund, it is suggested that fund houses put at least 25% in each of the three market categories, viz, large-cap, small-cap, and mid-cap companies.
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By spreading their portfolio holdings across each segment, multi-cap funds try to reduce the risks of the market and achieve growth. So, multi-cap funds could be less risky than capitalisation-weighted funds like large-cap, mid-cap, and small-cap. Multi-cap funds could be perfect for investors who don’t like to take risks or don’t want to be too aggressive.
Let’s look at some of the crucial points investors should take note of:

Know your risk
For long-term wealth growth, investors who are moderate risk-takers and do not have the time to examine a specific fund in the market can select multi-cap schemes.

Role of fund manager
A multi-cap fund invests in companies’ stock and stock-related instruments with various market capitalisations. In addition, the fund manager is always looking for ways to diversify the investment portfolio to meet the scheme’s objectives. As a result, fund management is critical to the success of these schemes.

Know your fund manager
Before investing, you should look into the fund manager’s prior performance across various schemes. You should also consider how he has handled the multi-cap fund during market ups and downs.

Multi-caps balance the portfolio
Fund managers are not restricted by company size and can choose those that best match the fund’s investment objective. Large-cap stocks can help keep a portfolio stable, while mid-and small-cap stocks can assist build capital. Here, a platform like 5paisa.com can assist you in building a solid portfolio.

Risk keeps changing
Keep in mind that because multi-cap funds have a bigger universe of stocks to choose from, the risk involved with them may change.

Investment horizon
Multi-cap funds provide a better risk-return trade-off, protecting investors from the downside while also providing upside potential. Investors with a moderate risk appetite and a five-year investment horizon might consider these funds.

Augmented Economy
A multi-cap fund manager can increase his exposure to mid-and small-sized companies to profit from higher earnings in a robust economy.

Don’t forget your investment goals
Before investing in any mutual funds, understand your investment goals, objectives, and risk appetite.