Making a Case for Multi-Cap Funds

Over the past three months, Mid-Cap and Small-Cap equity funds have witnessed a remarkable growth of nearly 15 per cent, surpassing the single-digit gains of Large-Cap funds. This sustained outperformance of mid-cap and small-cap funds has raised concerns regarding the effectiveness of returns within the large-cap category. As a result, investors are shifting their investments towards mid-cap and small-cap funds in search of better returns. 
 

Further, the underperformance of the broader market in the last few quarters is adding valuations’ comfort in the mid-cap and small-cap segment, and hence attracting increasing inflows. With increased institutional participation, market efficiency has risen in the large-cap domain. Coupled with the difference in expense ratios, this situation poses a challenge for active large-cap funds to outperform their benchmarks. While there may still be a few large-cap funds that outperform the index in the future, they are expected to be rare.
 

As per a report, 82 per cent of the large-cap funds have underperformed the benchmark over five years. Consequently, a preference is emerging for passive funds or funds with exposure to various segment of the market for long-term investments. While it may be tempting for investors to chase the current trend of mid-cap and small-cap stocks based on their past returns, it is important to maintain a diversified investment strategy across different market capitalisations. Mid-cap and small-cap funds offer potential for higher returns, but they can also experience periods of increased volatility.
 

In fact, in the last 17 months ending March 2023, the respective indices fell in double digits whereas the large-cap index experienced only a decline in single digits. Generally, large-cap stocks provide stability during a volatile market while mid-cap and small cap stocks exhibit higher growth potential. Thus, a multi-cap fund balances risk-reward and has the potential to create long-term wealth. Our cover story thus goes deep to understand the risk-return profile of various funds from this category to make your investment choice easy.