Multi-cap funds, an add-on option for your fund portfolio

In recent times, we see that the performance of the large-cap funds was a bit lower than the benchmark, although they are considered to be one of the safest options in the equity funds category. Many of the schemes are just unable to match the performance of Nifty50. After a correction of six months, the benchmark indices Nifty and Sensex seem to recover, but these schemes are still facing challenges. Thus to reap good returns, investors need to find other options to tide over market volatility.

Post categorisation, the large schemes will be investing their 80 per cent corpus in large-cap stocks, that is, in the top 100 stocks as per market capitalisation, classified by the market regulator. Previously, these funds used to invest in mid-cap and small-cap stocks too to generate a good alpha, but now the scenario will be very different for these funds. Now, these funds have a limited scope to deviate their portfolio among other market caps to generate alpha. So these funds are expected to generate a lower alpha in the coming period and are expected to perform with the benchmarks, here onwards.

So to generate returns investors should look into multi-cap funds as an investment option to add to their portfolio. These funds are largely large-cap biased which assures the safety of investment, but they enjoy the freedom of investing in other stocks from mid-cap and small-cap space, which suggest a higher return capacity. SEBI allows these schemes to invest 65 per cent of their corpus in equities without any restriction on the market cap.

But the phenomena which will reap higher returns will also bring more risk into the investment. So allocating full investment to these funds will be a bit risky. Hence, these funds can be an add-on to one's fund portfolio to maintain returns and achieve the desired financial goal.