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Business News/ Money / Personal Finance/  Multicap funds make good case for investors
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Multicap funds make good case for investors

Multicap funds can be suitable investment option for new-to-the-market investors


First lesson in investment that anyone teaches you is that of asset allocation and diversification. While asset allocation is one way of diversification, most investors often see them as one and the same thing. Yes, it’s true, both are adapt ways of minimizing risk and optimizing the return potential of an investment portfolio. However, in practice, they are different. While asset allocation is a way of diversifying your portfolio by investing across asset classes, diversification is a broader concept and refers to investing in different sub-segments within a single asset class. This diversification within an asset class is essential in a portfolio as markets are dynamic.

Stock markets today are experiencing the sort of volatility that is bound to make investors nervous. The ongoing relentless pandemic, inflation concerns, rising US treasury yields, volatile commodity prices, among others, offer more than one reason for investors to be wary of investments. However, this uncertainty is not without its wealth-creation opportunities. While some companies languish in such economic conditions, others thrive.

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Multicap funds are inherently diversified because they invest in stocks across different market capitalizations, i.e., large cap, midcap, and small cap. What makes this category singular in its strategy is that it is mandated to invest a minimum of 25% in each of 3 caps, with the remaining 25% left flexible to invest across all three. Investing in a multicap fund helps you gain exposure to all segments of the market, irrespective of the market cycle.

This means that in any given market environment, be it a bullish or bearish market, the stability of large caps and the higher growth potential of mid and small caps helps balance the portfolio. Also, this way, your downside risks could be limited in a falling market.

The definition of what constitutes the large, mid, and small cap stocks is reviewed on a half-yearly basis by mutual fund industry body, Association of Mutual Funds in India (AMFI). Broadly, the top 100 listed stocks make up the large cap stocks, midcap stocks are those that fall within the 101st and 250th and from the 251st stock onwards, the small cap universe begins. The large cap portion of the fund provides stability with comparatively lower downside risk, mid cap provides a balance of growth and stability, and the small cap portion tends to boost portfolio performance in the long term.

An investor choosing a multicap fund gets exposure to the entire market via a single fund. This is especially appealing for those looking for a consolidated exposure to the equity market through one single financial solution, as opposed to investing in funds with a concentrated strategy.

Also, in any market cycle, the performance or returns capability of each market cap will vary. Moreover, even within each market cap, stock performances can vary based on the individual company’s growth prospects.

Multicap funds can also be a suitable investment option for young and new-to-the-market investors who have the risk appetite and a long-term investment horizon but are indecisive about which market caps to choose from. Multicap fund makes a good case for long-term investors too who want to build wealth and meet their financial goals with a potentially better risk-return trade off. For an unbiased flavour of market, these investors should have an ideal investment horizon of about five years.

All in all, multicap funds aim to provide a better risk-return trade-off through limiting the downside risk while generating reasonable opportunity for upside.

DP Singh is chief business officer at SBI Mutual Fund.



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Published: 07 Feb 2022, 11:14 PM IST
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