SHOULD YOU INVEST IN MULTI-CAP FUNDS?
These funds are a way to moderate your risk-reward profile
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.