Are multi-cap mutual funds for you?

Leading equity indices in India have already appreciated by more than 25  per cent  in the last one year and some scrips have appreciated manifold. This puts us in a situation where all the low hanging fruits have already been bagged. Hence, the current situation of Indian equity market is that of a stock picker market. This makes the situation a little tricky for a mutual fund investor who is trying to select the right kind of fund at the current juncture.

Every mutual fund category has its own set of advantages, while large-cap funds can give you stable returns, midcap and small-cap funds can generate better returns in a rising market, sectoral funds will help you to add zing to your portfolio. One of the mutual fund categories that take advantage of the current situation is multi-cap funds. They are intended to find higher growth opportunities in the rising markets and at the same time helps to reduce the negative impact of a bearish market condition.

Multi-cap funds can invest in companies irrespective of their market capitalization value. They can have large-cap, mid-cap, small-cap stocks, or a mix of stocks in their portfolio. More importantly, multi-cap funds can shift their portfolio constituents depending upon the market conditions giving them an edge over other types of funds which are dedicated to some category. In the last one-year, multi-cap funds have generated average returns of 27  per cent , which is lower than small-cap funds that generated returns of 35  per cent  in the same period. However, it is comparable to mid-cap fund that generated returns of 28  per cent .

It has been observed that small-cap dedicated fund tends to outperform in a rising market. Whereas large-cap funds give a better relative performance in a falling market. This does not mean that they do not move in sync with the market. But ideally, they tend to fall less compared to small-cap and mid-cap dedicated fund. But a multi-cap fund changes its nature depending upon the market condition and are likely to perform better than the other funds in the longer run.

The performance of multi-cap funds very much depends upon the fund manager’s understanding of market different sectors and how he churns his portfolio accordingly. Moreover, as a multi-cap fund's manager has a larger universe of choice, selecting right stocks is critical for his performance. A higher churning in the portfolio might create higher volatility in the fund’s performance. Hence,  a multi-cap fund is ideal for long-term investors who can withstand fluctuations for a short period.