Posted on 5/25/2023 6:30:00 PM

Whatever your goals or risk appetite, equities should be a part of your investment portfolio. Equity is an asset that can deliver good returns, especially in the long term. But not all investors have enough expertise to research and analyze thousands of companies and cherry-pick a few. That is where mutual funds come to a rescue. But how do you choose the right mutual fund scheme?

For example, if you choose a large-cap mutual fund scheme, the mutual fund manager invests mainly in the top 100 listed companies of India. It is the same with all the other mid-cap and small-cap schemes. It can be a limiting feature that prevents diversification.

Multi-cap schemes can help tackle this issue. Read on to understand more about multi-cap mutual fund schemes in detail.

What is a multi-cap mutual fund, and how does it work?

Unlike large-cap, small-cap, or mid-cap mutual funds, where the fund manager chooses stocks based on market caps, multi-cap mutual funds invest in large-cap, mid-cap, and small-cap stocks altogether.

These schemes can invest your capital in different stocks of different market caps. The proportion of the fund distributed among large-cap, mid-cap, and small-cap may vary depending on the market situation.

When there is a bull run and the market conditions are stable, the fund manager may increase the fund's exposure to small-cap and mid-cap stocks in a hope to increase profits. Whereas, when the market has slowed down or is not so stable, the fund manager may decide to stay invested majorly in large-cap stocks to reduce the risk. This way, multi-cap funds help investors and fund managers tackle various issues.

Benefits of multi-cap mutual fund schemes
Following are some of the advantages of investing in a multi-cap mutual fund scheme:

1.  Increased market exposure
Multi-cap mutual fund schemes are not restricted to any single sector or market cap. As a result, these schemes can invest in all types of stocks across sectors. This increases the total market exposure, and the fund manager can pick the potential stocks among various sectors, eventually increasing the chance of gaining profits.

2.  Gives the fund manager enough space
Multi-cap mutual fund schemes let the fund manager show their professionalism in finding and analyzing some of the good stocks registered on the exchange. This flexibility also results in appropriate asset allocation according to the market conditions. For instance, when the market is unstable, the fund manager can limit the fund's exposure to small and mid-cap stocks.

3.  Diversification
Multi-cap mutual fund schemes invest in many sectors. This way, these schemes offer a diversified portfolio which mitigates the overall portfolio's risk.

Things to consider before investing in multi-cap mutual fund schemes
Following are the things an investor should keep in mind before investing in a multi-cap mutual fund scheme:

1.  Exposure to small and mid-cap stocks
When you invest in a multi-cap scheme, your funds are exposed to various small and mid-cap stocks. These funds can be volatile, especially when compared to large-cap stocks. As a result, multi-cap schemes can be volatile on a short to medium-term basis.

2.  Expense ratio and exit load
Asset management companies (AMCs) charge investors to cover costs like the fund manager's fees and various operational costs. The expense ratio is calculated by adding and dividing such expenses by the fund's total assets under management (AUM). The more the expense ratio, the greater the fund's management cost.

Meanwhile, exit load is a fee charged when an investor exits the mutual fund scheme. To keep things simple, remember that the lower the expense ratio and exit load, the higher your profits could be.

Multi-cap mutual fund schemes offer investors a flexible and diversified investment option by allowing fund managers to invest in various stocks from various sectors and market caps. While these schemes can offer increased market exposure and give fund managers the freedom to find some good investment opportunities, they can also be volatile due to exposure to small and mid-cap stocks. Investors need to consider a multi-cap mutual fund scheme's expense ratio and exit load before deciding to invest.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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