Investing in Mid & Small Caps through Multicap Funds: The Optimal Approach?
Multi-cap funds, a relatively new category in the investment world, have recently shown impressive returns, with an average of 14% in the past three months. These funds, which have the flexibility to invest in large, mid, or small caps, are gaining popularity due to their ability to offer exposure to the mid and small-cap segments with comparatively lower volatility than investing directly in these segments.
Diversification Across Market Caps
The key to this lower volatility lies in the diversification that multi-cap funds provide. These funds must allocate at least 25% to each of large, mid, and small caps, ensuring a balanced portfolio that combines growth potential from mid and small caps with stability from large caps.
Lower Volatility and Better Risk-Adjusted Returns
Pure mid and small-cap funds tend to have higher price swings due to the higher risk nature of smaller companies. The large-cap portion in multi-cap funds softens this volatility, leading to more consistent and often superior long-term returns compared to flexi-cap or pure mid/small-cap funds.
Suitable for Investors Seeking Growth with Moderate Risk
This balanced risk profile makes multi-cap funds a preferred choice for those seeking growth with moderate risk. They provide a growth-oriented yet moderated risk profile, making them a better option for investors wary of sharp swings but wanting exposure beyond large caps.
Performance Comparison
A study of a proxy multi-cap fund's performance against the Nifty Midcap 150 and Nifty Smallcap 250 indices between June 2013 and June 2023 showed that the multi-cap portfolio had higher average returns and less volatility compared to the small-cap index. However, the mid-cap index still had the highest returns.
In terms of trailing returns, the proxy multi-cap fund outperformed the small-cap index across five- and seven-year periods, while the mid-cap index had the best run based on this metric.
Downside Protection and Asset Allocation
In terms of downside protection, the multi-cap portfolio did better than the mid-cap and small-cap indices in 6 out of 11 periods. The asset allocation for this multi-cap fund is determined by the average market-cap allocation of multi-cap funds over the last 2 years.
The volatility of the multi-cap portfolio was slightly less than that of the small-cap index and less than that of the mid-cap index. The asset allocation for the proxy multi-cap fund is as follows:
- Others/cash: 6.46%
- Small caps: 26.68%
- Large caps: 41.66%
This fund is rebalanced on January 1 every year to maintain this allocation.
A Better Way to Take Exposure to Mid- and Small-Caps?
With these advantages, there is a question of whether multi-cap funds could be a better way to take exposure to mid- and small-caps. While only a few investors make substantial returns from mid- and small-cap funds, multi-cap funds could potentially provide high returns with lesser volatility compared to mid- and small-cap funds.
In conclusion, multi-cap funds effectively balance the growth opportunity of mid and small caps with the lower volatility of large caps, making them a better option to access the mid and small-cap space with reduced volatility compared to investing exclusively in mid or small-cap funds.
- For individuals seeking growth with moderate risk, multi-cap funds offer a suitable investment option due to their balanced risk profile that combines growth potential from mid and small caps with stability from large caps.
- The flexibility to invest in large, mid, or small caps, coupled with lower volatility, has contributed to the growing popularity of mutual funds and equity funds as an alternative to flexi-cap or pure mid/small-cap funds.
- With technology advancements, personal-finance enthusiasts can easily access and manage their investment portfolios, including multi-cap funds, through various digital platforms available in the education-and-self-development sector.
- As entertainment becomes increasingly integrated into our lifestyle, it's important to consider diversifying financial investments to ensure a stable financial future and capitalize on potential growth opportunities in various market sectors.
