Best Multi-Cap Mutual Funds in 2020

What are multi-cap mutual funds?

Multi-cap mutual funds are equity-based mutual funds that invest in varying proportions in stocks of different companies. Instead of sticking to a particular market capitalization, multi-cap funds invest in large cap, mid-cap, and small-cap stocks in their portfolio. Since the investment is highly diversified across all markets, multi-cap funds are less risky and popular among investors with medium risk appetite.

Since the stocks are from different market capitalizations, a fund manager can easily switch holdings in the fund between large-cap, mid, and small-cap stocks as he/she deems fit, based on market movements.

Multi-cap funds are excellent for beginners who are unaware of the stock market and different capital markets.

Here are a few things to consider as an investor:

• Fund Objective - Multi-cap funds are good investment options as they are an ideal combination of high growth and risk. These funds accumulate considerable growth and offer good returns over the long-run. In addition, the fund manager ensures that the portfolio is composed of quality stocks.

• Risk - Multi-cap mutual funds are subject to market risk when there is a rise/fall in the value of the stock index. This leads to a fluctuation in the fund value. The volatility experience by multi-cap mutual funds is higher than that experienced by large-cap funds but lower than small/mid-cap mutual funds.

• Cost - A multi-cap fund is subject to an expense ratio. This is the cost of running and maintaining the fund. As per SEBI, the upper limit of expense ratio is 1.05%. Multi-cap funds have a higher turnover ratio and associated transaction cost. When compared with pure large-caps or small-caps, multi-cap funds may be seen to have a higher expense ratio. In short, expense ratio is the annual expense incurred by funds, expressed in percentage of their average net asset.

• Investment Horizon - Multi-cap funds are suitable for investors who are looking for a medium or long-term investment horizon. As an investor it is advisable to remain invested in a multi-cap fund for as long as possible in order to realize its full potential.

• Financial Goal - Multi-cap funds accumulate substantial wealth over the investment horizon. They are ideal for achieving long-term financial goals such as retirement planning, children’s higher education, etc.

• Fund Returns - This is measured by the way of the fund’s performance. Returns are annualized returns, the amount of money earned by the fund in a single financial year. Returns are usually looked on, basis the historical performance. Historical performance measures the annualized returns of the fund over 3 to 5 years. It is advisable to purchase a fund that has performed consistently well over the past five years or since its inception.

• Fund Manager - The fund manager plays an important role when it comes to managing a mutual fund. Apart from fund performance, you should also look into the fund's performance under different fund managers. A fund manager with a good reputation is an ideal option. In addition, you can also examine the track record of the fund manager with respect to the success rates in delivering higher returns.