Multi-cap funds have become a popular option among investors seeking a balanced exposure to equity funds that reflect the growth story of India across various market segments. They combine the stability of large-cap stocks with the explosive growth potential of mid and small-cap stocks.
But the secret to the success of multi-cap funds is their strategic allocation to various asset classes. In this blog, we will explore the significance of allocations in multicap funds.
What Are Multicap Funds?
Multicap funds are diversified equity mutual funds that invest a minimum of 25% in large-cap stocks, mid-cap stocks, and small-cap stocks according to the SEBI mandate. The remaining 25% can be allocated flexibly by the fund manager depending on the prevalent market conditions.
Multicap Funds offer a well-rounded exposure across the corporate spectrum from blue-chip leaders to emerging challengers, to help investors benefit from growth in various market cycles.
- Large-caps (Top 100 companies by market capitalisation) offer stability and consistent returns.
- Mid-caps (101-250 companies by market capitalisation ) provide higher growth potential and moderate volatility.
- Small-caps offer potential for high alpha returns but with higher risk and price fluctuations.
By combining these three, multicap funds provide a diversified portfolio that can perform well in various market conditions. For example, this type of strategic allocation can be seen in Nippon India Multi Cap Fund, managed under Nippon India MF, which maintains disciplined exposure across Large Cap(47.36%), Mid Cap(25.53%), and Small Cap(25.75%).
Why Allocation Matters in Multicap Funds
The way a multicap fund spreads its investment has a significant impact on returns and risk of the portfolio:
Diversification
By mandating exposure to all three market caps, multicap funds reduce the concentration risk associated with any particular segment or sector. When one segment underperforms, gains in other sectors can balance out the losses, making the portfolio more resilient during market downturns.
Risk-Return Balance
Large caps provide stability and liquidity, whereas Mid-caps offer a blend of security and higher growth potential, while small caps offer potential for outsized returns during bullish markets. This allocation ensures that the fund doesn’t swing too aggressively with market sentiment but still has significant growth levers to capitalise on the market movements.
Dynamic Flexibility
Fund managers can use the discretionary 25% to tilt the portfolio based on changing market cycles, opportunities, or sector themes, giving them the room for tactical moves while still maintaining regulatory discipline.
Liquidity Management
Having a large portion of the portfolio in large-cap stocks ensures that multicap funds are able to manage redemptions more efficiently during volatile times, due to the higher liquidity of blue-chip stocks.
Benefits of Allocation in Multi-Cap Funds
Some of the advantages of strategic allocation in multi-cap funds are as follows:
Stable Long-term Growth
Strategic allocations help multi-cap funds capture sectoral and capitalisation-based growth while keeping the risk at moderate levels. This makes multi-cap funds suitable as a core portfolio holding for investors seeking wealth creation over the long term.
Professional Oversight
Fund managers manage multicap funds, and they consistently track macro trends and micro opportunities for dynamic rebalancing of allocations for optimum risk-adjusted returns.
All-in-one Simplicity
Investors are not required to choose between separate large-cap, mid-cap, or small-cap funds. A single multicap fund can provide them with wide-ranging exposure to the equity market.
Conclusion
Multi-cap funds offer a balance between risk and reward. However, before you invest, make sure to research different multi-cap funds and their managers to make smart investment choices. At WhatIFoundToday.com, we believe that even the simplest ideas, when driven by purpose, can inspire real, meaningful change.