07 OCTOBER, 2019

Historically, mutual funds have been the preferred choice for investors who want to get the benefits of the stock market without investing in stocks directly. However, the recent slowdown in the economy, global trade wars, and weak corporate earnings have kept the Indian stock market under pressure for the last few months.
This raises the following question among many investors.

Should I invest in Large-cap, Mid-Cap, or Multi-cap mutual funds?

Mutual fund investments are long-term investments. The short-term volatility and ups and downs of the market need not affect your long-term investment strategy. However, it's important to understand various types of mutual funds and their investment objective and style, to ensure it suits your investment objective.

Broad Classification of Equity Mutual Funds:

Mutual funds can be broadly classified into Large-cap, Mid-cap, Small-cap, and Multi-cap funds. Large-cap funds invest predominantly in large-cap companies while small-cap and mid-cap funds allocate it to small-cap and mid-cap companies. Multi-cap funds have no such restrictions and can be moved between various market-cap companies as per the decision of the fund-manager.

How to Choose Equity Funds?

Since large-cap companies are considered to have strong balance sheets, their stocks are known to offer stable returns. Small and mid-cap companies’ stocks, however, offer higher growth potential but are more prone to volatility and risk.
Thus, Mid-cap and Small-cap funds are generally suited for investors with a high-risk appetite, whereas investors with relatively low-risk tolerance usually prefer Large-cap funds.

This is where multi-cap funds come into the picture.

What are Multi-cap Funds?

As the name implies, these are equity-based mutual funds that invest in a large-cap, mid-cap, and small-cap companies. These funds are known to offer many advantages to the investor and are preferred, especially during a bear market. Some of its key benefits are:

  • They offer Flexibility: As the fund allocation is not restricted to a particular market-cap, the fund manager can take better call to switch between small-cap mid-cap and large-cap companies, depending on the market condition. For instance, during a bear market, the fund manager may shift the majority of allocation to large-cap companies to protect the interests of the investor. And similarly, on the return of the bull-phase or during the recovery phase, the fund manager can unlock the earning potential of mid-cap and small-cap companies by allocating assets accordingly. 
  • Prevent Tax Leakages: Equity mutual funds attract LTCG tax of 10% on gains exceeding 1-lac per year. Thus, switching mutual funds as per market conditions can lead to tax-drain. Multi-cap funds allow fund managers to shift asset allocation between large-cap, small-cap, and mid-cap companies depending on market conditions. Hence they allow you to take advantage of market volatilities without having to redeem your funds without losing your gains to tax leakage. 
  • Creates the Right Balance: A multi-cap funds bring the right balance between growth and volatility. As these funds are diversified between different market-capitalisations, they are known to offer the benefits of both the worlds. Fund managers are able to create a balanced investment portfolio that has a mix of risk and growth.


Choosing the Right Type of Equity Mutual Fund

While large-cap funds suit investors with a relatively low-risk appetite, small and mid-cap funds are known to be more aggressive in nature.

A healthy portfolio is one that is well-diversified across various market-capitalisations. It's important to choose the right type of mutual fund based on your risk-profile and end-goal.

With multi-cap funds, you can build a diversified portfolio without having to invest in different market-cap funds individually. Hence, investors with limited experience and with an aggressive style of investing may consider multi-cap funds.


Disclaimer: 
Mutual fund investments are subject to market risks, read all scheme related documents carefully. 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.