An investment into this category offers one a front-row seat to the stable giants of the market, the dynamic growth stories and the small-scale gems all in one go. This is a multi-cap fund, a category that mandates a minimum of 25% allocation each to large-cap, mid-cap and small-cap stocks.
The past three years have seen some multi-cap funds deliver phenomenal returns, with the top performer, Nippon India Multi Cap Fund, bringing a notable 28% CAGR, and even the lowest, Quant Multi Cap Fund, returning a 18%, the category is a package deal for investors.
Though the range of returns is stellar, the all-round investment does not come without challenges.
"While star performers like Nippon, Kotak, and HDFC Multi Cap funds have consistently delivered over 25% CAGR, a significant 50% of multi-cap funds have unfortunately underperformed their respective benchmarks," highlights Rushabh Desai, founder of Rupee with Rushabh.
This reality shows the need for investors to choose the right fund to avoid potential underperformance.
How To Pick The Right Multi-Cap Fund
Desai's core philosophy for selecting a multi-cap fund is based on the fund's consistency in beating the index on a rolling return basis.
He emphasises that while top and bottom performers may shift, the true mark of a good fund lies in its consistent outperformance, driven by a quality fund manager, a great team and a well-defined investing philosophy.
"One needs to think about the possibility of small and mid-cap not performing well. There have been prolonged periods where they have given no returns," he points out.
The possibility of prolonged periods where small and mid-cap segments might offer no returns, according to Desai, will introduce volatility and the risk of underperformance to the portfolio.
How Many Multi-Cap Funds Should You Hold
Desai advises that multi-cap funds should be a component of a diversified portfolio, rather than forming the entirety of an investor's holdings. He also notes that pairing a multi-cap with a flexi-cap fund can provide a balanced approach.
"One multi-cap fund should do the job for one portfolio," he said. The stellar returns recently witnessed in small and mid-cap segments are not guaranteed to continue, given their volatility and cyclical nature.
Ultimately, Desai said that investors have control over risk through diversification and should maintain a minimum five-year investment horizon for multi-cap funds, as the bull run in the market is yet to start.
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