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Lot investors are confused about choosing companies or funds depending on the market capitalization. So there is another category of a fund called the Multicap Fund. These funds invest across different market capitalization and sectors. This article provides good detail about the funds and also suggests some best performing funds of 2020.

best multicap funds

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What are Multicap Funds?

The equity-based funds that can invest across different market capitalization, sectors, themes, and segments without any SEBI interference are known as Multicap Funds. These funds have to invest at least 65% of total assets in equity and equity-related securities.

Why invest in Multicap Funds?

As the fund managers of these funds are allowed to invest in any security across the market, this will enable them to exploit market opportunities and manage risk according to the changing valuations and various technical and fundamental factors. The fund can take advantage of the stability provided by large-cap companies and growth provided by small-cap and mid-cap companies to increase profits and reduce risks.

Who should invest in Multicap Funds?

Investors who cannot select which market capitalization to invest in or are having trouble in stock picking can invest in these funds for a starter and shift to pure cap funds once they can select the market capitalization or stocks. These funds are also suitable for those investors who hedge their risk portion.

Those investors who have a moderate risk appetite can invest in these funds as small-cap and mid-cap provide higher returns but with more risk, and large-cap provides stability to this increased risk. During the market rally, the small-cap and mid-cap would perform well, and during the slump, the large-cap companies would provide stability and hold erosion of returns.

Things to consider before investing

  1. Fund Objectives – These funds tend to achieve wealth accumulation by combining high growth, risk, and value. The stock picking can be based on some investing style like value or growth.
  2. Risk – Risk of these funds are more than large-cap funds but less than small-cap and mid-cap funds.
  3. Cost- These funds charge an expense ratio to manage your money. Other than the expense ratio, some funds also charge an entry load and exit load.
  4. Investment Horizon- These funds are suitable for those having an investment horizon of medium or long term.
  5. Financial Goal – These funds adopt a dynamic investment strategy, which helps accumulate wealth and achieve long-term financial goals.

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How to evaluate these funds?

  1. Fund Returns – An investor should look at the annually generated returns by the funds in the last few years before investing.
  2. Fund and Fund Manager’s History – An investor should look at the history of the fund and the fund manager and see how they have performed over the years.
  3. Expense Ratio – Choose a fund with a low expense ratio as this adds to the cost of investment you make.
  4. Financial Ratios – Look at some of the parameters like risk-return provided by the fund. Sharpe Ratio can help you have a better understanding of the fund’s performance.

Best Performing Multicap Funds of 2020

Recommendations

These funds are a good investment option to start for an investor. They have moderate risk and provide high returns in the medium and long term. People who are investing for the first or want good knowledge about how mutual funds work are an excellent option to invest in. Before selecting the fund to invest in, do a good analysis of the fund and compare it with other funds with the help of the quantitative and qualitative measures mentioned above.

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