As markets are volatile, investing in multi-cap funds can help mitigate risks and position the portfolio for higher long-term returns. A multi-cap strategy ensures that investors are not overly concentrated in any single segment.
The average one-year returns of the top 15 funds in the past one year is 34%. While Axis Multicap Fund has given returns of 40% in one year, returns of LIC MF Multicap Fund and Baroda BNP Paribas Mutual Fund were at 38%. Over a three-year period,Nippon India Multi-cap fund has yielded 27%, followed by Kotak Multicap at 26%.
Optimise risks
By mandate, these funds invest a minimum of 25% each in large-cap, mid-cap and small-cap stocks, while maintaining a 25% buffer to invest across market caps. This enables the fund manager to optimise returns while managing risks.
This dynamic approach ensures that multi-cap funds can seize opportunities across different segments of the market, irrespective of the market cycle. “The large-cap component ensures stability, while mid- and small-cap stocks contribute to alpha generation during market upswings,” says Nirav Karkera, head, Research, Fisdom.
Multi-cap funds provide a more balanced option to investors as compared to mid-cap and small-cap funds. And at a time when the valuations of mid-cap and small-cap stocks in general are elevated, multi-cap funds provide a balanced option to invest. The diversified exposure allows investors to benefit from opportunities across market segments, especially in volatile market conditions.
Investors should evaluate the fund manager’s strategy for mitigating risks by adjusting allocations based on market cycles, such as increasing large-cap exposure during downturns for stability or tilting toward mid- and small-caps during recoveries.
Vivek Sharma, head of investment, Estee Advisors, says the flexibility of multi-cap funds enables fund managers to assess the market environment and tactically reallocate assets to capitalise on emerging opportunities. “This ability to dynamically adjust the portfolio enhances the potential for generating alpha,” he says.
Investing period
Multi-cap funds are suitable for investors seeking capital appreciation with moderate risk, provided they maintain a longer investment horizon to allow for compounding and to weather cyclical impacts. These funds are exposed to cyclical risks due to their diverse allocation across large, mid, and small-cap stocks.
Investing in multi-cap funds requires an investment period of five years or more to benefit from growth cycles across different market caps while navigating market volatility. “This duration allows the fund manager to navigate through market cycles, leveraging cyclical recoveries and managing sectoral rotations effectively,” says Anirudh Garg, partner, Invasset PMS.
What to keep in mind
Before investing in multi-cap funds, investors should evaluate the fund’s composition to ensure it complements their existing portfolio without creating overexposure to specific sectors or market caps. They should consider the fund’s expense ratio, risk-adjusted returns, and consistency in outperforming benchmarks. It is important to consider the fund’s strategy for navigating economic cycles, handling downturns, and capitalising on market recoveries to achieve consistent returns.
Investors must take note that bigger isn’t always better. So, if a fund’s assets under management is too high, the manager might struggle to deploy the money effectively, potentially missing smaller but high-growth opportunities.
Multi-cap funds may rebalance their portfolios based on market dynamics. Investors must review the fund’s rebalancing strategy and monitor its performance regularly. Investors must also note that the diversification benefits should be weighed against the inherent risks associated with exposure to mid- and small-cap segments.