Go by firm's equity track performance when selecting multi-cap fund

These funds can capture growth across market caps; and even if one segment underperforms, damage to them is limited

At a time when the Nifty and the Sensex are scaling new peaks, two fund houses—Canara Robeco and Mirae—have announced the new fund offers (NFOs) of their multi-cap funds. These funds have delivered a robust category average return of 26.7 per cent over the past year, surpassing the performance of flexi-cap funds, which have yielded 22.7 per cent.

Different from flexi-cap funds

Multi-cap funds, like flexi-cap funds, can invest in stocks across all market caps. However, their fund managers are obliged to assign a minimum of 25 per cent each to large-, mid-, and small-cap stocks. Investors in these funds get constant exposure to all three market cap segments. Their portfolios maintain at least 75 per cent allocation to equities at all times, albeit with less flexibility than in flexi-cap funds. The fund manager can invest the balance 25 per cent wherever she desires.

The fund manager of a flexi-cap fund can invest across market caps without any such limitation.

Diversification benefit

Multi-cap funds are able to avoid the risk that can arise from overexposure to one particular market segment. “Multi-cap funds offer diversification benefits by investing across market capitalisations and sectors. This helps reduce risk compared to investing in a single market capitalisation. Also, these funds can potentially capture growth opportunities across the market spectrum,” says Chintan Haria, head-investment strategy, ICICI Prudential Mutual Fund.

Will they be volatile?

Many investors fear that the minimum allocation of 50 per cent to mid- and small-cap stocks could make these funds volatile. Experts say the 25 per cent available for allocation freely provides adequate leeway to fund managers to ensure stability. “Fund managers invest the balance 25 per cent in mid- and small-cap stocks during periods of economic expansion to boost performance. When they perceive macro-economic headwinds, this 25 per cent is allocated to large-cap stocks for stability,” says Ravi Kumar TV, founder, Gaining Ground Investment Services.

According to certified financial planner (CFP) Parul Maheshwari, “Large-, mid- and small-cap stocks perform differently from one another at different points of time. Investing across all the three market cap segments lends stability to the portfolio. Even if one market segment underperforms, the damage to the portfolio is limited,” she says.

Opt for multi-cap funds now?

Multi-cap funds can constitute the bedrock of your portfolio. “A multi-cap fund can serve as a core fund in the portfolio and can be used to meet long-term financial goals. Even though 50 per cent of the portfolio is invested in mid- and small-cap stocks, a patient investor will benefit from the long-term growth opportunities offered by the companies present in a multi-cap fund’s portfolio,” says Haria.

Adopt a disciplined approach

Currently, investors may avoid investing directly in mid- and small-cap funds after the run-up in these stocks. Instead, they should go for a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP) in a multi-cap fund with at least a five-year tenure.

Multi-cap funds are also ideal for beginners. “A first-time investor, who has the risk appetite for mid- and small-caps, can consider an SIP in a multi-cap fund. Seasoned equity investors can build their own portfolios using a mix of large-, mid- and small-cap funds,” says Maheshwari.

Stick to high performers

The multi-cap category came into existence in its current avatar in January 2021, so these funds don’t have much of a track record. “Scrutinise the track record of the fund house, its fund managers, and their investment styles,” says Maheswari.

Pick a fund from a house that has demonstrated the ability to manage portfolios across all three market caps over time.

Ravi Kumar suggests allocating up to 25 per cent of the equity portfolio to multi-cap funds. “Only an allocation of this level will result in a discernible difference in return over the long term,” he says.

Maheshwari points out that the equity portfolios of moderate risk takers should have at least 65-75 per cent exposure to large-cap stocks and 25-35 per cent to mid- and small-cap stocks. Bear this point in mind while investing in a multi-cap fund.