1. What are Multi-Cap Funds?
Multi cap funds invest in equity shares of companies which belong to different market capitalization. Instead of sticking to a particular capitalization, these funds incorporate large-cap, mid cap and small cap stocks in the portfolio in a specific proportion. As compared to pure mid cap/small cap funds, these funds are less risky and popular among investors who are less aggressive about returns. The fund manager is well-positioned to pick stocks across capitalization and sectors as per his outlook of the market. The investor, thus, may stay free from anxieties regarding chasing the action or missing out on rallies in a particular sphere of the market.
Apart from stock-picking, the fund manager keeps switching holdings in the fund between large-cap, mid and small-cap stocks as he deems fit, based on market movements. Using the leeway, the fund managers tend to have a large cap bias and keep on increasing or decreasing their mid-cap holdings by a small margin as and when market conditions change. Since these funds are invested in multi cap companies, during a bull run they deliver stupendous returns, sometimes even outperforming the pure large/mid cap funds. This happens because, during a bull market, the underlying stocks in the funds are able to unlock their values and tap into the growth opportunities.
2. Who should invest in Multi-Cap Funds?
Multi-cap funds maintain an extensively diversified portfolio consisting of stocks of different market capitalization and sectors. These funds are a good way to take exposure to broader equity segment by means of nominal systematic investment plan (SIP) of as low as Rs 500 to begin with. Investors who don’t want to get into the trouble of stock-picking or deciding which market capitalization fund would suit them may go for multi-cap funds as a starter. They may switch to pure cap funds after getting a hang of markets. They are also suited for beginners and novice investors who intend to hedge their risks.
From a risk-return perspective, multi-cap funds are adept at balancing the risk and volatility very well when it comes to blending the small caps and mid caps in a single portfolio. At the same time, the investor may expect the stability that they would receive from a large-cap fund. During the market rally, small-caps perform well and when it is a slump, the well-established companies tend to take a hold of erosion of returns. Those who have a moderate risk appetite may think of investing in multi-cap funds.
3. Things to consider as an investor
a. Fund Objectives
Multi cap funds aim to achieve wealth accumulation by investing in stocks of companies which offer the best combination of high growth, risk, and value. The stock picking is based on investing style which can be value investing or growth investing. Additionally, the fund manager may consider other quantitative measures like P/E ratio, EPS and Enterprise value to ensure that the portfolio is composed of only quality stocks.
Like other equity funds, multi cap funds also face the market risk wherein an overall rise or fall in the value of the index leads to a fluctuation in the fund value. Such volatility is higher than that experienced by large cap funds but lower than small cap/mid cap funds. The fund manager is skilled at regularly modifying the asset allocation in order to take advantage of market movements.
Multi cap funds charge an expense ratio to manage your money. Till now SEBI had mandated the upper limit of expense ratio to be 2.50%. As these funds are actively-managed to harness gains from market opportunities, it might have a higher turnover ratio and associated transaction costs. Compared to pure large caps/small caps, multi cap funds may have a higher expense ratio. However, the quantum of gains made by multi caps are good enough to compensate for high costs.
d. Investment Horizon
Multi cap fund are basically suitable for individuals who have a medium to long-term investment horizon. Equity Linked Saving Scheme (ELSS), is a diversified fund which comes up with a lock-in of 3 years. Usually, the fund experiences a lot of fluctuations during the short-run which averages out over the long-run. Those who choose multi cap funds need to be prepared to stick around at least for the said period to enable the fund to realise its full potential.
e. Financial Goals
Multi cap funds can be ideal wealth creators as compared to plain large cap funds. Because of a dynamic investment strategy, these funds may accumulate larger wealth for achieving long-term financial goals like children’s higher education or retirement planning. Being a high risk-high return haven, these funds are capable of generating enough wealth which may help you to retire early and pursue your passion in life.
4. How to evaluate Multi-cap funds?
a. Fund returns
Fund performance by way of the annualised returns is considered a crucial factor for ranking or selection of funds. Investors may look for returns for a period of at least 5-10 years. One may, in fact, select funds which have consistently beaten their benchmark indices (index to which a fund’s returns are compared). They should also fare reasonably well when compared with their peer set over the longer time frames.
b. Fund history and Fund manager
In case of multi-cap funds, along with fund history, fund manager plays important role in running the entire show on expected lines. A strong parentage from a trusted fund house is necessary before you invest in a fund. You need to look into past performance and reputation of the asset management company. Ideally, it should also have a clean and long business history of at least say 5 years. It ensures that the fund has seen all the market cycle of slumps and rally. Additionally, examine the track record of fund manager as regards his success rates in delivering higher returns.
c. Expense ratio
Expense ratio is the annual expense incurred by funds expressed in percentage of their average net asset. It is charged out of the overall returns earned by the fund. This is what the mutual funds charge investors for investing on their behalf to manage their money. Direct Mutual funds tend to have lower expense ratio as compared to Regular Mutual funds. You can save a lot on distributor commissions. You need to choose a fund which has a lower expense ratio.
d. Financial ratios
With significant risks involved, the risk-return ratio becomes an important factor for consideration. In order to judge this, Sharpe Ratio is an important metric associated with multi-cap fund’s performance. Sharpe Ratio is an indicator of risk-adjusted return. It represents the excess return given by the fund over return given by a risk-free instrument. Simply put, the higher the Sharpe ratio, the better is the risk-adjusted return for that fund.
5. Top 10 Multi-Cap Funds in India
While selecting a fund, you need to analyze the fund from different angles. There are various quantitative and qualitative parameters which can be used to arrive at the best multi-cap funds as per your requirements. Additionally, you need to keep your financial goals, risk appetite and investment horizon in mind.
The following table represents the top 10 multi-cap funds in India based on the past 5 year returns. Investors may choose the funds based on a different investment horizon like 10 years returns. You may include other criteria like financial ratios as well.
|Fund Name||1 year||3 year||5 year|
|Tata Equity PE Fund||14.62||17.19||24.99|
|Invesco India Contra Fund||23.47||16.75||24.50|
|Aditya Birla Sun Life Advantage Fund||11.31||14.97||23.09|
|Aditya Birla Sun Life Equity Fund||13.20||15.42||22.56|
|Aditya Birla Sun Life Special Situations Fund||19.08||15.50||22.31|
|Principal Multi Cap Growth Fund||19.08||16.97||22.22|
|Franklin India High Growth Companies Fund||5.01||8.82||21.81|
|SBI Magnum Multicap Fund||15.25||14.86||21.62|
|Reliance ETF Junior BeES||15.52||17.17||21.26|
|HDFC Capital Builder Fund||16.77||14.35||21.00|
*The order of funds doesn’t suggest any recommendations. Investors may choose the funds as per their goals. Returns are subject to change.
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