Ride the market volatility with multicap mutual funds

Low interest in savings account schemes and the increasing realisation to save more for the future have prompted many people to divert their earnings towards mutual fund investments. However, choosing the right kind of mutual fund puts people in a quandary as they scramble to seek information from the internet or approach investment advisors for the much-needed financial advice.

Investing in mutual funds (MFs) means being subjecting your money to market fluctuations. However, much of the uneasiness can be allayed if you put your money into multicap MFs. A discussion with some of the industry's top-notch experts lend a deeper understanding of what mutual funds are and the benefits of investing in them.

Understanding multicap funds

Sebi regulations mandate investment of 65% of the multicap MF corpus into equity and equity-related financial instruments. The diversity of multicap MFs is attributed to the inclusion of large-cap, mid-cap and small-cap stocks of various companies. Rahul Agarwal, director, Wealth Discovery/EZ Wealth, says, "Multicap funds are diversified mutual funds which can invest in stocks across a range of market capitalisations. These funds are best for investors who do not want to get tied down to only specific size companies and want their portfolios to have the flexibility of switching in and out of companies based on market conditions."

Are multicap MFs risky?

Multicap MFs are best suited to risk-averse investors looking to create a corpus for retirement or planning to save a large chunk to invest in their children's higher education. However, CS Sudheer, founder and CEO, Indianmoney.com, says, "The risk in multicap funds depends on the fund manager's approach. Some managers follow the large-cap driven approach, while others have a mid-cap focus, which increases the risk. Investors must look beyond just returns, as a wrong call by the fund manager increases risk."

Why invest in multicap funds?

As opposed to large-cap, mid-cap and small-cap MFs, the benefits of putting your money into multicap MFs include:

Low risk: Risk-averse investors complain that investing in mid-cap and small-cap funds makes them more vulnerable to market volatility. Sahil Arora, director & group head - investments, Paisabazaar.com, says, "Multicap funds can invest across all market capitalisation and sectors without any pre-specified caps. This allows them to change their exposure to different market capitalisations according to changing market conditions. Thus, under the current market conditions, multicap funds are better placed to exploit market opportunities and manage risk arising out of changing valuations and various fundamental and technical factors."

Flexibility of fund managers: Flexibility has a deciding factor on the quality of the investments made. Considering that multicap mutual funds are a mix of large, mid and small-cap stocks of various companies, fund managers find it easy to shuffle between them to lower the risk while continuing to earn good returns. Rachit Chawla, founder and CEO, Finway, says, "There is a thumb rule of investment: the larger the variety, the better will be the return. As multicap mutual funds are based on this, an investor can invest in stocks across market capitalisations using an extensively diversified portfolio. The diversified portfolio offers freedom to switch from one cap stock to another depending upon the performance of stocks; this practice ensures the least impact of market fluctuations and garners a better return on investment."

Adding to this, Rajeev Srivastava, head -retail broking, Reliance Securities, says, "In the current environment, multicap funds provide greater flexibility to fund manager to change or switch the investment distribution amongst large, mid and small-cap stocks as they deem fit, based on the outlook for the market."

Duration of investment

Investments in the market must always be for a long period. This stands true for multicap MF investors too. Vineet Patawari, co-founder, stock analytic app StockEdge and financial market learning portal Elearnmarkets.com, says, "For wealth creation using any equity product including multicap funds, the length of the investment is very crucial. One should remain invested for a minimum of 7-10 years to get good returns from multicap funds. Since multicap funds have a broader horizon, they behave in tandem with overall markets. A longer time horizon exposes you to at least a full market cycle and thus saves you from any short-term fall in the market."

Investing online

The internet has made it possible for potential investors to shuffle through the content on websites before making their choice of investments. Advising on the factors that customers must look into, Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, "One needs to look at short/long-term performance, consistency of performance, risk parameters, fund manager stability, style, expenses charged, downside protection, etc. One cannot choose the fund based on the returns alone."

Preferred mutual funds

There is no absolute answer to which mutual funds must be preferred over others. Jeevan Kumar, head - investment advisory, Geojit Financial Services, says, "Investors can choose the fund looking at fund managers' credentials than looking at the portfolio because equity allocation across capitalisation can change any