Utilize the Flexibility of Multi-cap Funds

By BankBazaar | November 7, 2011

As an investor, when you make an investment in an equity mutual fund, do you advise your fund manager on which stocks to buy and not? Well, your answer may be muddled between a yes and a no since you want to safeguard yourself from all the exorbitant market risks and avert yourself from buying loans like personal loan, home loan etc which can burden your finances due to interest payments and EMIs, this road is best not taken. However, on the contrary, a fund with a fixed investment mandate will pick only beneficial funds for you, without the investor worrying, advising or panicking in any manner for the cause of his investments. For example, a large-cap fund will make investments solely in blue chips and other index-based heavyweights, without making any investments in small-cap companies. As a result, large-cap funds tend to progress slowly and in a secure manner, as compared to investments in other categories. On the other hand, a small-cap fund will make investments in comparatively smaller organizations, hoping to secure a small organization that will hit a jackpot in the long run. Multi-cap funds give you the best of both the world by investing across a wide array of stocks, from large-cap organizations all the way down to small-cap organizations. They thus, offer a flexible mandate to the investor, picking winners across the varied market capitalizations giving you an edge over the market.

Financial analysts believe that greater returns are propagated by an investment only when the fund management process of your investment offers greater flexibility. This advantage is offered by multi-cap funds since they possess an in-built mandate which captures the upside of the market spectrum. In the last 3-5 years, equity funds diversified in multi-funds have offered greater returns than those belonging to other categories of diversified funds. It is thus best for investors to make investments in those market segments that attract carrying market capitalizations, as they demonstrate great volatility and returns. In this way, multi-cap funds provide investors an offer to construct a diversified portfolio by offering all kinds of equities for investment. It can also be observed that over the past one year, mid-cap funds have performed exceedingly well as compared to other categories of funds, creating a niche for themselves as the best-category for long-term wealth investment.

As a result of the flexibility in the mandate of multi-cap funds, investors have increased access across greener investment pastures in any type of market setting. When a bullish period is at its introductory stage, large-cap funds tend to perform exceedingly well. Through the period of the bull-run, these large-cap stocks tend to reach high valuations and the focus of the investment community shifts massively to other mid-cap and small-cap funds. Also, since retail investors cannot gauge in on which part of the market will perform well at a specific period of time, mid-cap funds offer the best bet of investment since it is a win-win situation in all market conditions. This strategy may also prove beneficial during the downturn of the market as well, since if certain given conditions do not benefit one part of the mid-cap investment, it will definitely prove beneficial to the other set of investment made by your mid-cap fund. It thus creates a counter-balance effect on stocks, generating long-term benefits for the investor. One may also note that when the market is in a deplorable economic state, small-cap and mid-cap funds tend to be largely affected as compared to large-cap funds. However, mid-cap or multi-cap funds are able to cushion themselves from the risks of the market and its vulnerable segments.

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