Get Yourself a Complete Investment Platter with Multi-Cap Funds

A balanced meal needs every type of nutrient, be it protein, fats, or carbohydrates. Each nutrient has a role to play in ensuring that the body remains healthy. Similarly, in investing, various types of investments play different roles.

For example, investing in large-cap companies can offer relative stability. Contrarily, investing in small-cap stocks can offer relatively higher growth potential. A successful investor needs both growth and risk management. The multi-cap fund can offer a balanced investment approach.

In this article, we’ll discuss everything you need to know about the multi-cap fund and its role in your investment portfolio.

What is a Multi-Cap Fund?

A multi-cap fund is an open-ended fund that invests in equities across all market capitalisations, including large-cap, mid-cap, and small-cap. Under SEBI’s Multi Cap category, funds must invest a minimum 75% in equities with at least 25% each in large-, mid-, and small-cap stocks. Just like a balanced meal has fats, proteins, and carbohydrates, a multi-cap fund creates a balanced portfolio by investing in companies of all sizes.

Multi-cap funds are an effective tool to gain exposure to listed companies of all sizes. They aim to capture the best-performing companies within each bracket, in an effort to deliver for long term.

As we know, different food groups have different roles. Protein is the building block of the body while carbohydrates provide energy. Similarly, large-cap companies provide potential stability and access to larger, organised markets. Similarly, mid- and small-cap companies offer investors access to companies that are challenging larger players and have higher growth potential.

What are the Benefits of Investing in a Multi-Cap Fund?

Advantages of investing in a multi-cap fund include:

Access to All Market-Caps – A multi-cap fund provides exposure to listed companies of all sizes. This composition ensures that you invest in a balanced portfolio each time. This means that investors gain access to larger companies that are operating in major sectors as well as relatively smaller companies that may be operating in more niche sectors. Investing in a multi-cap fund can provide access to a broad swathe of the Indian formal economy.

Long-term Wealth Creation Potential – A multi-cap fund offers the potential for long-term wealth creation. As the economy grows, quality companies with room for growth are cherry-picked by expert fund managers into the portfolio. Hence, investors can benefit from being a part of the growth story of promising listed corporations in India, regardless of size.

Balanced Risk vs. Reward – As mentioned earlier, large-cap stocks are relatively more stable, which lowers the volatility and risk associated with the investment. In contrast, small-cap stocks have higher growth potential, which increases the potential reward of the investment. Investing in a multi-cap fund provides exposure to both large-cap and small-cap stocks, which can balance the risk and reward profile of your investment.

Performance across Market Cycles

Different market caps tend to grow during different parts of the market cycle. For example, small-cap and mid-cap stocks tend to perform better when the market is bullish. In contrast, large cap stocks to offer stability when the market is bearish. Investing in a multi-cap fund can mean that the investment potentially performs across the whole market cycle.

Wrapping Up

Multi-cap funds can act as a complement to investments in other types of investment styles (such as thematic funds or factor-based investing), in other types of asset classes (such as gold and debt), or in other geographies (such as global funds).

A multi-cap fund can be the anchor to a well-balanced portfolio for potential long-term wealth appreciation. Investors may choose a multi-cap fund if they want exposure to a mix of promising Indian names with a balanced risk vs. reward profile just like healthy eaters choose balanced meals for optimal health.

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