Funds Intro #5: Multi-cap Funds – The truly diversified funds

Posted By : Kushal Kothari

Equity investing is finally coming of age. The current bull-run which started sometime back in October 2013, has spiked the interest of many investors to add equity as an asset class in their investment portfolio. Mutual Funds do a good job of providing a vehicle for professionally managing money contributed by thousands and lakhs of investors.

However, all equity investing is not the same. One can invest in Equities based on various parameters/strategies based on the size of the companies (Large, Mid, Small caps), the investment style (Value/Growth), or even based on Sectors (Pharma, Banks, and Diversified). Among these, the most prominent consideration while choosing a fund is the size of the companies being invested in. The entire universe of listed companies can be split into three categories based on the market value of the companies– Large cap, Mid-cap and Small-cap.


Large-cap companies are the giants that tend to do steady business in their respective industries (e.g.: Reliance Industries, HDFC Bank etc.). The size of these companies is typically above 20,000 crores rupees.


Mid-Cap companies are those, that are renowned brands in their industry while are also growing at a moderately fast pace. These companies tend to have a market cap of higher than 5000 crores.


Small-cap companies are the rising stars of the equity markets. Because of their relatively smaller scale, the scope for growth is highest in these companies. Though at the same time, the risk of compliance and business operations is also very high for these companies.


However, there is a school of thought that ignores the size of the company for investment decisions. Good investments, based on value or potential for growth, can be found across the spectrum regardless of how big or old the company is. This is exactly what Multi-cap funds aim to achieve.


Multi-cap Funds:


What are they? These are funds that invest in equities, regardless of the size or sector, they belong too.


USP? Invest in the entire spectrum of listed equities by spotting opportunities for value or potential growth while not being constrained by sectoral or market-cap considerations.


Where do they invest? These funds invest in stocks where they see the value (i.e. market price is lower than fair value) or potential growth (that could rapidly increase the value of the investment). Based on the mandate of the scheme, these funds can take very concentrated bets (20-35 stocks), or can be diversified in more than 50 stocks. Some of these funds may even invest in foreign securities provided they see a good opportunity.


What to look out for? When the only mandate for the fund is to identify good opportunities wherever they exist, one should look at the consistency of performance for these scheme to beat market indices. Also, these schemes will have a higher risk than large-cap schemes, though they should typically achieve a higher return over the long term. 


Why should you invest? Markets are anything but consistent. Sometimes there are opportunities to invest in a specific sector e.g. Pharma companies. Sometimes, mid-cap and small-cap scheme tend to outperform large-cap companies (As we have seen happen since 2014). Multi-cap funds are ideal for those who would want professional fund managers to capture opportunities wherever they exist without bothering too much about rebalancing between different equity schemes.


Expowealth take – In terms of risk and return potential, Multi-cap schemes tend to sit between the large-cap ones and the mid-cap ones. While not as volatile as mid-cap schemes, Multi-cap schemes tend to take selective bets on investments across the spectrum and thus tend to have better performance than large-cap schemes. We recommend Multi-cap schemes for anyone looking to add a diversified equity exposure to their portfolio, and willing to take higher risk than investing in just large-cap schemes. Our current recommendation in this category as of this date is Most 35 Multicap scheme based on various quantitative and qualitative parameters.


Hope this helps.


Happy investing!


P.S: Motilal Oswal is one of the AMC partners of Expowealth. We only recommend direct schemes and do not get any commission for client invested funds.