A complete guideline for Multicap funds

What are Multi-cap Funds? Risks & Returns

While stock markets present an excellent opportunity for investors to gain out of the growth of leading companies, it comes with the risk that is parallel to the growth potential. As a result, many investors stay away from investing in stocks mainly due to this factor. Mutual funds are seen as an immediate solution for this. You can invest in stocks of growing companies with lesser risk through mutual funds. But what type of mutual fund should you choose for this? Among others, multicap mutual funds are an ideal option. Let’s learn more about multicap mutual funds and examine whether investing in them is a good option for you. 

What are multicap funds?

To understand multicaps funds better, you should understand the different market capitalisation groups of companies in India.

According to the Securities and Exchanges Board of India regulation, companies are divided into three groups based on their market capitalisation.

They are large cap, mid cap, and small cap.

Large cap companies

According to SEBI guidelines, the top 100 companies listed in the stock market according to their market capitalisation are included in the group of large cap companies. 

These companies usually have a proven track record, and their stock market journey is mostly stable and trustworthy. As a result, they tend to come with lesser risks. At the same time, their growth tends to be more predictable, and since these are already big companies, they need not have significant growth in the future. 

Mid cap companies

Companies that come in the 101st to 250th rank in the SEBI’s market capitalisation list are called mid cap companies. These might have a lesser track record than large cap companies but are still fairly significant. Therefore, compared to large cap companies, these can give you higher returns as there still can be potential to explore. However, at the same time, the risk associated with investing in them tends to be higher as well.

Small cap companies

After the 250th one in the SEBI’s list of companies according to their market size, every company is considered a small cap company. As the name suggests, these companies are small and upcoming. That means that there could still be unexplored potential, and it gives a much bigger chance for higher returns. But, obviously, that could also mean that there is a higher risk that comes with investing in small cap companies.

Multicap funds

Multicap funds are mutual funds that invest in all three market capitalisation groups giving a diversified investment option. According to SEBI regulations, a multicap fund should have at least 25% representation from each market cap group: small cap, mid cap, and large cap.

This ensures that you have the stability of investing in a large cap fund and, at the same time, higher return potential of investing in small and mid cap funds. 

Why should you choose multicap funds?

Multicap funds give you the much-needed diversification when looking to invest in stock markets through mutual funds. Moreover, since there is representation from different market capitalisation groups, you get benefits of investing in all groups of companies.

Alternative to multicap funds

Flexicap funds are a more conservative alternative to multicap funds. They are known to be more dynamic, and there are no restrictions on the amount of representation from each market cap group. Rather, regulations say that a minimum of 65% equity representation should be in its portfolio. Moreover, the portfolio can be changed according to market conditions since it’s dynamic. 

Conclusion 

The first step towards investing is always finding what works for you the best. Make sure you talk to an investment advisor before you invest.