Mid-cap and small-cap funds offer good returns, but large-cap funds give your portfolio greater consistency. If a specific sector is doing very well, sectoral funds may increase the gains. However, you can consider investing in a multi-cap fund for the long term if you are a moderate risk-taker and need more motivation to research a specific fund in the market.

What are multi-cap funds? 

Multi-cap funds invest the corpus in stocks of firms with various market capitalisations related to equity funds. Investments in small-cap, large-cap and mid-cap enterprises can be found in multi-cap funds.

The multi-cap fund category is a choice to meet your risk tolerance because every plan invests in different quantities. These funds are considered a better choice for building wealth since the fund managers may take advantage of investment opportunities across the board. A multi-cap scheme can also be funded following your financial requirements.

How does a multi-cap fund work? 

Multi-cap funds have the potential to outperform large-cap funds in terms of returns, but the funds do so at the expense of mid- and small-cap funds. As a result, if you have exposure to a multi-cap fund, you will be exposed to businesses of all sizes and your investments will be moderately diversified.

Multi-cap funds allow you to increase your returns by investing in small-cap firms with strong growth prospects while also balancing your risk exposure through investments in large company companies.

Should you choose multi-cap funds? 

The fund manager’s opinions heavily influence a multi-cap fund’s performance because it invests in various market caps. Before investing, it is good to research the fund manager’s track record and long-term performance by way of volatility, portfolio concentration, and three- and five-year average annualised returns.

It’s crucial to have a glance at the portfolio into which the fund has put money during the course of its tenure. Given that multi-cap funds are not restricted to investing in any particular market, it is crucial for you to look into sectoral trends. By drilling down to that level of specificity, you can then make an informed decision.

3 factors to consider before investing in multi-cap funds 

Expense ratio: You need to be transparent about the costs that reduce your returns. Asset management companies charge you a fee known as the expense ratio for managing the multi-cap fund you intend to invest in. This fee is used to pay for the fund’s overhead costs, including the fund manager’s salary. The price is assessed annually.

Concentrating your portfolio: Evaluating the fund’s concentration is crucial to achieving diversity. Your portfolio runs the danger of being overexposed to a single sector, for example, if the fund manager is bullish on the IT sector and invests a bigger share of the corpus in mid, small, and large-cap fund’s company stocks from the sector.

Investment horizon: You should evaluate the investment objectives before investing in these funds. It is prudent to have an investment strategy of at least 5 years if you want to get a good return on your multi-cap funds’ investment.

Conclusion

Multi-cap funds are simple as they do not need any active management or monitoring from your end. Additionally, they offer built-in diversification without any additional work on your part.

Multi-cap funds, however, have two significant drawbacks. First, the funds cannot tailor the product to your particular needs; your allocation depends on the fund manager’s judgement. Second, overseeing capitalisation classes is a specialist job, and managing large and small caps may be challenging for a single manager.

The best course of action is to manage your large-cap and mid-cap allocations independently instead of relying on multi-cap funds.