If you can’t cope with stock price fluctuations, stay away from investing in equity assets, including equity oriented mutual fund schemes.

But do note that not all companies expose you to a same level of volatility.

The difference between big and small companies…

Big companies more often have stable businesses, strong financials and they are mostly managed by experienced people. As a result, their stock prices experience lesser fluctuations as compared to those of emerging companies.

Though smaller companies have a high growth potential, their businesses and earnings aren’t as stable as those of industry leaders. The movement of their stock prices is extremely unpredictable and volatile.

Investors’ suitability…

If you invest in mutual funds, you must have heard of various terms—large-cap funds, mid-cap funds, small-cap funds, value funds, and multi-cap funds.

Investors with a high-risk appetite shall ideally, invest in large-cap oriented mutual fund schemes. The primary provision is you must have at least a five-year investment time horizon.

[Read: Are These Top Large Cap Mutual Funds Worth Your Investment in 2018?] 

Those with a very high-risk appetite and longer time horizon can invest in mid and small-cap oriented schemes.  

[Read: Do You Fear The Decline In Mid Cap Funds? Don’t, If You Invest The Right Way!]

(Image source: unsplash.com)

But what if you aren’t sure about which market capitalisation to skew your investments, but are willing to take the high risk?

Well, then you may consider Multi-cap Fund and/or Large & MidCap Fund.

Multi-cap funds, which invest across capitalisations––large cap, mid cap and small cap fund –– could be an alternative.

While large-cap funds offer stability, mid-cap funds and small-cap funds offer the excitement of supernormal returns, though they expose you to higher risk.

But if you wish to stay away from small-caps, for the fact that they are even more risk that mid-caps, then you may even consider large-and-mid-cap funds that try to get you the best of both the worlds. They invest in a portfolio consisting of both large-cap and mid-cap stocks. Hence, Multi-Cap funds and Large & Mid-cap funds offer investors stability as well as a high-return potential.

Earlier, mutual fund houses were defining market capitalisations at their discretion which resulted in confusion among investors. Many mutual fund schemes were actually mid-cap biased although they classified themselves as ‘multi-cap’. Hence, to rationalise this and to put an end to the confusion, the capital market regulator, SEBI, came up with the “Categorization and Rationalization of Mutual Fund Schemes”. As a result, many schemes were renamed and re-categorised.

[Read:Your Mutual Fund Scheme Renamed. What Should You Do? ]

Multi-cap funds as characterised by the regulator are the ones that across large-cap, mid-cap, and small- cap stocks with a minimum 65% investment in equity & equity related instruments.

Hence, the fund manager is free to play across market capitalisation.

On risk-return matrix, Multi-cap Funds are placed higher than Large & Midcap Fund.  Hence, if you are willing to take high risk and want to enjoy capital appreciation across market capitalisation segments, a Multi-cap Fund could be appropriate.

Indicative risk-return matrix

On the other hand, a Large & Midcap Fund as characterised by SEBI is required to invest minimum 35% investment in equity & equity related instruments of large-cap companies and simultaneously maintain minimum 35% allocation to mid-cap stocks (i.e. companies from 101st to 250th on full market capitalisation basis).

On the risk-return spectrum, a Large & Midcap Fund is placed a notch below a Multi Cap Fund.

Therefore, going by the new definition, Multi-cap Funds have the flexibility to move across market capitalisation segments and explore opportunities therein. While Large & Midcap funds have minimum investment criteria for investing in respective market capitalisation segments.

Investing in Multi-cap Funds and Large & Midcap funds make so much sense at this juncture. Here’s why:

• Benchmark equity indices such as the S&P BSE Sensex and Nifty 50 are at an all-time high.

• Only a handful of Indian companies are posting consistently good numbers and expensive valuations are the key concern for mid-sized companies, in the absence of earnings growth.

• This being an election year, the markets might experience abrupt outflows if macroeconomic picture starts looking gloomy and political stability becomes a concern.

• Many mid-sized companies have fallen massively from their peaks. Market reactions appear overdone even after considering lack of revenue visibility in case of many of them.

• Whenever growth picks up and Indian corporates start posting impressive earnings growth quarter after quarter, midcap stocks may generate attractive returns for their investors.

Doesn’t investing in Multi-cap Funds and Large & Mid-cap Funds sound encouraging? But currently it would be wise to take the SIP (Systematic Investment Plan) route to invest in them.

Here’s a checklist to follow when evaluating mutual fund schemes:

• Consider all quantitative and qualitative parameters for evaluating the attractiveness of various schemes.

• Assess how well a scheme has performed across market phases and time frames

• Know the philosophy of a mutual fund house

• Know whether or not it follows established investment principles and has in place sound investment processes and systems

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Happy Investing!

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