Choosing a fund?? Why not Multicaps!!

When people think of investing in an equity mutual fund, the most commonly asked question by them is which is the best fund to invest. Actually the first question should be which category is most appropriate to choose the fund from – whether it should be large cap, midcap, small cap, multicap, or sectoral fund category. Each such category has its own advantages - while large-cap funds can ensure stability in the portfolio, midcap and small cap funds can potentially provide exceptionally high returns, sectoral funds can provide a kicker to the returns if the going is good for the sector.

 Nevertheless among all these categories the one that stands out due to its considerable flexibility to invest anywhere is multicap category. Multicap funds are diversified mutual funds that can invest in companies across market capitalization. In other words, they are market capitalization agnostic and invest across the breadth of the equity market. Thus multicap funds are able to take advantage of the opportunities across market cap for the investment. The funds in other categories have restricted mandate and are constrained to stick to the companies that are defined by their defined market capitalization segment. For example a large cap fund will not be able to invest into mid and small cap stocks even if the valuations in these market cap segments become very compelling. Similarly a midcap fund is forced to remain invested in mid and small cap stocks even during severe bearish markets when shares of mid and small cap companies usually have a free fall.

In such a scenario a multicap fund having an astute fund manager can easily contain the downside by realigning market cap allocation as per the market situations. In a robust economic environment, the fund manager of a multicap fund can increase his bets on mid and small sized companies to benefit from earnings upgrades. And he moves his money from shares of mid cap companies to large cap companies to take a shelter, if he is expects prolonged bearish periods. Also a multicap fund is able to take advantage of both growth and value style of investment as their investment universe is very large.

Therefore in the long run multicap funds are usually better wealth creators than other categories as they can take advantage of investment opportunities across market caps. This fact is also supported by analysing the long term performance data of all categories. As per mutual fund performance data available as on 29 July, 2015 the large cap category has provided a return of 14.93% and 15.19% respectively during the past 10 year and 15 year periods, midcap category has provided a return of 18.05% and 19.32% respectively and multicap category has provided a return of 16.37% and 20.24% respectively over the same periods. Thus returns from multicap category are comparable to midcap category over the long term but come with lesser volatility. When compared with large cap category it has clearly beaten them during both 10 year and 15 year periods.

After asset allocation at broad level of debt-vs-equity, the second level of asset allocation that an equity portion of the portfolio requires is at the market capitalization level. But an average investor finds it difficult to assess which segment of the market will outperform – will it be large cap or midcap or small cap. Thus by investing in a good multicap fund they can benefit in any market condition as market capitalization decisions are taken care of by the fund manager who has necessary skills-set. But it is noteworthy that since a multicap fund has a much larger universe to invest, therefore risk levels of a multicap fund can quickly change. Thus the capability of the fund manager becomes a crucial thing for the success of a multicap fund. The fund manager should be able to read market conditions correctly and change the portfolio allocation of the fund as and when required.

            Therefore while selecting a multicap fund you should carefully check the past track records of both the fund and its fund manager. In short, it is beneficial for the retail investors that they select multicap funds as their core holding and do not get carried away by themes and mid-small-large cap schemes. It is especially useful for those investors who do not understand asset allocation and do not have a large portfolio.