SHOULD YOU IN­VEST IN MULTI-CAP FUNDS?

These funds are a way to mod­er­ate your risk-re­ward pro­file

India Today - - SMARTT MONEY/MUTUAL FUNDS - Anil Rego Fol­low by Tanvi Verma the writer on Twit­ter @vtanvi

Over the past few years, multi-cap funds have done sig­nif­i­cantly bet­ter than large-cap funds, pro­vid­ing in­vestors with a port­fo­lio diver­si­fied across stocks with small to large mar­ket caps. But are these funds for you? Let’s find out.

What are multi-cap funds?

Multi-cap funds in­vest in stocks of com­pa­nies across the mar­ket cap­i­tal­i­sa­tion spec­trum; they could be large­cap, mid-cap or small-cap stocks. In short, multi-cap funds have the flex­i­bil­ity to adapt their port­fo­lios ac­cord­ing to the mar­ket. Dif­fer­ent seg­ments in the mar­ket tend to per­form in dif­fer­ent phases. These funds typ­i­cally in­vest 50 to 90 per cent in large-cap stocks, 10 to 40 per cent in mid-cap stocks and up to 10 per cent in small-cap stocks.

What about fund strate­gies?

While some are called multi-cap funds, a large num­ber of funds, though not named as such, fol­low a multi-cap strat­egy. For in­stance, the ICICI Pru­den­tial Value Dis­cov­ery Fund, one of the best per­form­ing funds in the cat­e­gory, has con­sis­tently main­tained a multi-cap ap­proach with al­most 75 per cent in­vested in large-cap stocks, 20 per cent in mid-caps and the bal­ance in small-cap funds. The fund does not have any re­stric­tions on mar­ket cap­i­tal­i­sa­tion from an in­vest­ment man­date point of view. It does not fol­low a sec­toral ap­proach, but in­stead adopts a

It is ad­vis­able to stay in­vested in multi-cap funds for more than three years. These should be al­lo­cated to achieve some fi­nan­cial goals

value in­vest­ing strat­egy, buy­ing stocks whose prices are low rel­a­tive to their his­toric per­for­mance, earn­ings, book value, cash flow po­ten­tial and div­i­dend yields. Then there are funds which are it­self known as multi-cap funds like the SBI Mag­num Multi Cap Fund, which too has per­formed ex­ceed­ingly well over the past five years, re­turn­ing 24 per cent and 21 per cent for three and five years, re­spec­tively. The fund in­vests about 55 per cent in large-cap stocks.

Risk ver­sus re­turns

Be­cause the in­vest­ment al­lo­ca­tion has a di­rect im­pact on the risk pro­file, multi-cap funds bear a higher risk com­pared to large­cap funds. That said, multi-cap funds have done bet­ter due to the in­clu­sion of mid- and small-cap stocks in the port­fo­lio (these have done bet­ter than large-cap stocks in the past few years). Over the past three years, the cat­e­gory av­er­age re­turn for these funds has been 19 per cent, com­pared to 14 per cent de­liv­ered by the large cap cat­e­gory. Over the past five years, they have re­turned 17 per cent, com­pared to 14 per cent by large cap funds. The best per­form­ing funds in this cat­e­gory have re­turned 25 per cent in the past three years and 20 per cent over the past five years.

Are multi cap funds for you?

Multi-cap funds are re­ally for those who want to take a bal­anced risk ex­po­sure in the eq­uity space. For in­stance, if an in­vestor had in­vested in large-, mid- and small-cap stocks in the ra­tio of 50 per cent, 25 per cent and 25 per cent, re­spec­tively, dur­ing the past one year, his re­turns would have been around 13 per cent.

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