A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What are multi-cap funds?
Have you ever come across fund names like XYZ Multi Cap Fund while researching mutual fund information and wondering how these are different from the most popular large-cap funds? As the name suggests, a Multicap fund invests in large, medium and small companies, thus offering diversification among market capital in its portfolios.
As with SEBI’s product categorization circular issued in October 2017 that came into force in June 2018, equity funds can be classified into large, medium and small capital based on the type of shares they hold in their portfolio. There are many companies listed on the stock exchange on various stock exchanges in India. Large capitalization refers to the top 100 publicly traded companies in India by full market capitalization (market capitalization = number of shares listed on the stock exchange * price of each share). Mid-cap refers to the 101st to the 250th company in terms of full market capitalization, while the 251st company onwards in terms of full market capitalization are called small caps.
Large-cap funds invest in large-cap companies that have predictable and stable growth potential, while cap funds dress in small-cap companies that are currently undergoing high-potential growth but are equally risky. Large-cap funds are likely to provide lower but stable returns unlike small-cap funds which can be more volatile in the short term. The mid-cap fund invests in mid-cap companies that have high growth potential but do not show the risk associated with small capitals as these companies have already achieved some scale and stability. Midcap funds can offer higher returns than large limits without being too risky like small-cap funds. But they still have some element of risk that is higher than those of large-cap funds.
SEBI has issued clear guidelines (on September 11, 2020), for the allocation of assets in the different market capitalization segments that the Multicap Mutual Fund category must follow. Multi-cap funds are required to hold at least 75% of their assets in equity and equity instruments at any given time. The portfolio must allocate at least 25% of its assets to large-cap equities, 25% to mid-cap equities and another 25% to small-cap equities. While a multicap growth fund is a good option for diversification and long-term wealth creation, it can also be very risky in the short term since it has at least 50% exposure to small- and mid-cap stocks that are very risky in the short term. The upper limit for market capitalization exposure also limits the fund manager’s flexibility to switch allocation between various market capitalization stocks depending on its market outlook.
Investors should carefully evaluate their existing mutual fund investments and current exposure to various market segments before adding a multicap to their portfolio. Multi-cap funds are not suitable for those who have a time horizon of less than 5-7 years or have a low-risk appetite.
