If you are aiming to acquire long-term wealth creation, one of the ways you can do so is by opting to go ahead with equity mutual funds. As the name suggests, a significant portion of funds is allocated to equities. Just as it happens in the case of mutual funds, equity funds too have their own variants. One of the variants of equity funds is multi-cap funds. These funds are known for allocating funds to businesses across all types of market capitalisations. So, multi-cap funds invest in all small, mid, and large-cap funds.
How do multi-cap funds work?
Equity funds are known for investing the money pooled by the investors into the stocks of different companies. To follow the rules, mutual funds are required to be specific in their investment approach. A large-cap fund only allocates funds to the stocks of the top 100 companies. Likewise, small-cap funds only invest in companies that are ranked below 250 in terms of market capitalisation.
However, one of the variants, multi-cap funds, is the only category of equity funds that don’t come with a defined structure such as regulation on which size and sector of companies they can invest in. And thus, these equity funds are known for investing in large-cap, mid-cap, and small-cap stocks. However, it is also important to make note of the fact that the proportion of investments in these stocks could vary and it is dependent on the fund manager. The fund manager takes a look at the market conditions and after doing that, they will accordingly make adjustments to the proportion fund allocation of large-, mid-, and small-cap stocks in the portfolio of a multi-cap fund.
Things to do before opting for a multi-cap fund:
It is very important to check the qualification of the fund manager before opting for a multi-cap fund. That’s because multi-cap funds are the equity funds that are known for allocating funds across different market caps. Hence, the role of the fund manager is vital in determining the performance of the fund. So, before going ahead and signing up for a multi-cap fund, it is sensible to check things like the long-term performance of the fund and the fund manager’s past record. When you are checking the long-term performance of a fund, you need to check for parameters like portfolio concentration, volatility, and three-year and five-year annualized returns.
Other than looking at the past performance and the fund manager’s history, it is also wise to regularly check the portfolio this fund has invested in. As stated earlier, this variant of equity funds does not restrict itself to investing in any specific sector, it is better if you were to take a look into the latest trends in different sectors. By doing so, you will know which sectors to invest in and which sectors to avoid. Also, regularly checking the portfolio might also help you to take important decisions.
Are there any reasons to invest in multi-cap funds?
Listed below are some of the advantages that are associated with multi-cap funds:
- It is easy to achieve diversification:
One of the obvious advantages of multi-cap equity funds is the diversification it provides. Multi-cap funds are known for investing in companies that have varying market caps and sectors. This provides a natural diversification to your portfolio. With this variant of equity fund, you don’t have to choose between large-, mid-, and small-cap companies yourself. Multi-cap funds come with natural exposure to them all.
- It is possible to enjoy professional management:
While you may think that by opting for this type of mutual fund you may think you are required to carry out the investments, the fact is that the fund manager is responsible for carrying out investments. These fund managers are responsible for making decisions regarding fund allocation. An experienced fund manager can take advantage of market conditions and thereby optimise investments to provide the best returns possible.
- They are highly liquid:
Like other mutual funds, multi-cap funds are highly liquid schemes. A multi-cap fund is an open-ended equity scheme that can be easily sold at any time to recover your money. As these schemes don’t have a lock-in period. if you are in need of funds, it is possible for you to redeem your investments any time you need.