What are the advantages of investing in multi cap mutual funds?

These are diversified mutual funds which can invest in stocks across market capitalisation. As per regulatory mandate, these funds need to have a minimum investment in equity and equity related instruments of 65%.

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Multi-cap funds which have a mix of large-, mid- and small cap stocks are being recommended by investment advisors due to the flexibility they offer in terms of investing style

What are multi cap funds?
These are diversified mutual funds which can invest in stocks across market capitalisation. As per regulatory mandate, these funds need to have a minimum investment in equity and equity related instruments of 65%. Their portfolio comprises of large cap, mid cap and small cap stocks.

What is the advantage of investing in multi cap funds?
It is difficult for investors to find whether large-, mid- or small-cap will do well. The multi cap category gives flexibility to fund managers to keep switching holdings in the fund between large-, mid- and small-cap stocks as he deems fit, based on his outlook for the market. For example, when valuations in the mid- and small-cap spaces turn expensive the fund manager will have a high allocation to large-cap stocks and vice versa. Compared to this a pure large-cap fund needs to have minimum 80% of his portfolio in the top 100 stocks by market capitalisation, or a mid-cap fund needs to have 65% of his corpus in the stocks with market cap between 101-250. Over the long term, this category of funds carries lower risk as compared to pure mid-cap/small-cap funds.


Which category of investors should consider multi cap Funds?
Investors who don’t want to get into the nuances of picking individual stocks or deciding which market capitalisation fund would suit them may go for multi-cap funds to start with. Once they are sure of a category, they could even switch to those funds. Investors who want to balance risk and volatility in a single portfolio could also opt for multi-cap funds. This category of fund suits those with a moderate risk appetite. Multi cap funds can be ideal wealth creators as compared to plain large cap funds. On account of this dynamic investment strategy, these funds may accumulate larger wealth for achieving long-term financial goals that are more than 10 years away. Investors looking to stagger their investments through systematic investment plan (SIP) could also look to using this category of funds.

What time horizon should investors look at?
While investing in equity as an asset class, investors should look to invest for a time frame of at least 5 years. This long time frame cushions against volatility and helps benefit from the power of compounding.
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