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What is Multi Cap Funds? - Explaining Multi-cap Funds in detail

These are diversified mutual funds that through market capitalization can invest in stocks. In other words, they're agnostic to market capitalization. These funds use stock fluctuations commensurate with the conditions of the market.

What is a Multi-cap Fund

Multi-cap funds are those that diversify their investments into all three categories (small, medium, and large-cap).

These funds invest by market capitalization of shares. That is, there are large caps, mid-caps and small-cap stocks in their portfolio. Compared to a pure mid-cap or a small-cap investment, they are comparatively less volatile and ideal for investors who are not so aggressive.

How Multi-cap Funds are Different

Funds in other categories, such as large-cap, mid-cap, small-cap, multi-cap, have mandates for restriction and are forced to adhere to the companies that are defined by their portfolio. For example, even if the valuations in the market might seem lucrative, a large-cap fund will not be able to invest in mid-and small-cap stocks.

Similarly, even if the market does not perform up to the mark, a mid-cap fund is forced to remain invested in mid and small-cap stocks. A multi-cap fund works to be a better choice for the investor in such a scenario.

Multi-cap funds are, therefore, usually better wealth creators in the long run than other types of funds as they can take advantage of market-wide investment opportunities. In contrast, long-term returns from the multi-cap class are comparable to the mid-cap category, resulting in lower volatility.

Who should invest in Multi-cap Mutual Funds

Investors who are moderate risk-takers and who are not inclined to market research on a particular fund may consider investing in multi-cap schemes to create long-term wealth. Such funds have the ability, as discussed above, to deliver better returns than large-cap, but offer lower returns relative to mid-and small-cap funds.

So, if you have a multi-cap fund exposure, you'll be exposed to companies of different sizes and you'll be fairly diversified with simplicity.

Risk of investing in Multi-cap Mutual Funds

As these schemes also invest in mid-cap and small-cap stocks, they are riskier than large-cap funds that mostly invest in big business. The fund manager of a multi-cap fund can increase his exposure to mid and small scale enterprises in a robust economic environment to benefit from earnings. He can also choose to transfer investor money from mid-cap companies' stocks to large-cap companies' to take cover if he expects extended downtime. That's why you might find volatility in this fund segment.

Things to consider before investing in Multi-cap Funds

Because a multi-cap fund invests across various market caps, the views of the fund manager are critical to determining the performance of the fund. Until investing based on parameters such as three-year and five-year average annualized returns, volatility, and portfolio concentration, it is advisable to test the fund manager's record and long-term results.

It is also important to look at the portfolio invested by this fund during the tenure. Because multi-cap funds are not limited to investing in any specific market, it is of utmost importance for an investor to look at sectoral patterns, as some sectors might not be preferred to invest in, so you might drill down to that level of detail and decide accordingly.

Last Words

Because of its large and varied investment universe, a multi-cap fund can provide both growth and value to investors. In the long run, these funds are usually better creators of wealth.

The most important rule to follow when it comes to investing money is not to put all your eggs in one basket. An investor should diversify their equity (large-cap, mid-cap, and small-cap, multi-cap), debt, and other instruments, including a portion invested in traditional investment tools.

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