Do’s And Don’ts Of Multicap Funds

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In the latter half of 2020, the Securities and Exchange Board of India (SEBI) had revised investment norms for multi-cap funds to promote midcap and small-cap segments of the market. As per the guidelines now, multi-cap funds need to have a minimum of 25 per cent in large-cap stocks, 25 per cent in mid-cap stocks, and 25 per cent in small-cap stocks. The remaining 25 per cent can be invested anywhere, unlike previously when multi-cap funds were not subjected to market capitalisation restrictions.

What are large-cap, mid-cap, and small-cap companies?

According to SEBI’s definition, “The first 100 companies in terms of full market capitalisation are large-cap mutual funds. The companies that are ranked 101-250 are mid-cap and the 251st company onwards come under small-cap companies.”

Do’s of multi-cap funds

Benefit of risk

  • As multi-cap funds have significant allocations to mid and small caps, you need to have a higher risk profile and larger investment horizons. With the volatility in the market, fund managers tend to change the percentage of the fund invested in stocks.

Returns

  • Multi-cap funds provide attractive returns as compared to large-cap funds. This fund is beneficial for those who are investing for the medium and long term.

Benefit of diversification

  • Multi-cap funds offer diverse portfolios across industries.

Easy management

  • In terms of management, multi-cap fund makes your job easy and simple. You need not worry about identifying large-cap funds, mid-cap funds, and small-cap funds. Instead, a multi-cap portfolio can fulfil your requirement.

Different mutual fund categories

  • A diverse portfolio of securities tends to help reduce risk.

Don’ts of multi-cap funds

Do not imitate others

  • Like with anything else, managing your multi-cap funds is also prone to error. You may be tempted to imitate someone else’s mutual fund portfolio that has performed well. But imitating others will only increase your risk because of a mismatch between investment goals.

Do not ignore investment costs

  • A multi-cap fund charges an expense ratio to manage your money on your behalf. There are chances that multi-cap funds may have a higher expense ratio as compared to small or large caps.

What not to do with multi-cap funds?

As this scheme also invests in mid-cap and small-cap stocks, the risk is comparatively higher than large-cap funds that mostly invest in big businesses. So, consider the risk and make your choice accordingly.

You should not allow emotions to control decisions while looking for investment opportunities. You need to make decisions only after thorough research and considering trends and facts. Any personal bias can land an investor into a pool of wrong decisions leading to mistakes in multi-cap funds investment.

Are multi-cap funds for you?

Multi-cap mutual funds involve risks like any other investment. The best way to reduce the same is by consulting an expert and by knowing your financial goals. Mutual fund investors who do not want to get into the hassle of stock selection should begin with investment in multi-cap funds.

A multi-cap fund invests across various segments. Hence, it is important to consider the views of the fund manager to determine the performance of the funds.