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Understanding the Multi-Cap Mutual Funds

 

These funds offer a greater choice to fund managers in selecting companies

MUTUAL fund investors have a wide array of options regarding the type of funds that they can choose for their portfolio. Earlier the classification was simple as there were equity diversified funds and within this category too the funds could be separated into areas like large-cap equity, mid-cap equity, index funds and so on.

In recent times there is an added confusion for the investor because they find that there are several funds that do not fit into these previously considered broad categories at all and hence there has to be a different way in which these need to be analysed.


Multi-cap funds: The fund, which invests across a range of areas, and sectors are known as multicap funds. As the name suggests these are different from the traditional largecap or mid-cap funds as there is likely to be the presence of companies with different levels of market cap in the portfolio of the fund. This can make the segregation of the fund quite difficult and hence investors have to understand the changing situation differently at various points of time.

These funds thus represent a greater choice for the fund manager in the manner of selection of the companies within the portfolio.


Changing nature: The first way in which these funds need to be considered is by actually considering the current stocks or areas where the investment is actually made. The flexibility for the investment provides a wide amount of choice for selection of the stocks in the portfolio. For this reason, it is essential that the investor consider the allocation that is given to the different areas in the investment declaration of the mutual fund offer document. This will provide the range within which the holdings will be visible but this can also change quickly.

The investor could find out that for some time the fund is in the nature of a large-cap fund while at other times it functions as a small-cap funds. On several occasions there might not even be specific characteristics of the fund as various stocks with different market caps are similar in size.


Fund manager: This manner of construction of the portfolio is also an important reason why the fund manager occupies an important position for the investor into such a fund.

The fund manager will decide upon the selection of the various holdings in the portfolio and if this is done in an effective manner then there is a good chance that there will be an outperformance for the fund. The downside is also high as there are various times when the view of the fund manager will not work out as expected and in such a situation there can be a wide divergence in the performance of the fund. Focus on the style of fund manager to manage the fund will be a critical r decision while selecting a particular fund.
Evaluation: The evaluation of such funds is not an easy task because they are constantly changing their characteristics. So for example, if this was in favour of the large-caps then you might be comparing their performance to how the large-caps are doing but while doing that you might realise that the fund is actually a mid-cap fund so you need to change the benchmark.

One of the ways in which the activity can be undertaken is by using the benchmark that is mentioned by the fund. The other way of doing this is also be looking at some benchmark that you might set out on your own and that can be used as a guidepost to look at how the situation is turning out to be.

 

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