Need for Multi Cap fund in a Portfolio

POSTED BY Trishit Ray ON September 28, 2011 6:10 pm COMMENTS (5)

A Multi Cap fund is a mutual fund that has a mandate for investing in any market cap/sector.It is the most flexible type of mutual fund as the fund manager does not need to restrict its investment to a certain kind of stocks or for certain ratio in that kind of stocks.It is treated as riskier as it may have more mid or mid and small cap exposure than the investor would like.This exposure can prove to be fruitful in a bull market and if the fund manager is not active and good enough this can be fatal to the fund.A Multi Cap fund like any type of fund has a place of its own.But is there any need for it to have in a portfolio?

I ask this in a market that has been sufferring and is rumoured to suffer further due to various international and I am not aware but may be few domestic factors.So you may think that I am asking beacause muti-cap funds are sufferring more.But this not the case.

Suppose a person has one large cap,one large & mid cap and one small & mid cap fund is it not diversification enough?What another multi-cap fund will do extra in that portfolio?

A multi cap fund which has a good track record and almost everybody will tell me is the best in its category is HDFC Equity.Nothing against it.But if you analyse more carefully it has almost total overlap with another diversified equity fund in large & mid cap category.Guess what the name of that fund is HDFC Top 200!Almost everybody has it.No wonder the performance of the two funds are similar.

You may complain that these are from the same AMC and nobody is supposed to have more than one fund from the same AMC.Right.But overlaping is not the only concern.Barring few(one I already mentioned) most of the multi cap funds don’t have a better show than the diversified funds in recent years.I don’t want to bore you with statistics here, please go to valueresearch or moneysights and see for yourself.Even the less risky large cap funds have better returns.

I am not questioning if one should invest in multi cap funds or not.One can and should invest according to his/her goals and risk taking ability.My question, is there any need for Multi Cap fund in one’s portfolio just for diversification’s sake?

Post what you think.I welcome debates and discussions.

Thanks in advance.

Regards,

Trishit Ray 

 

5 replies on this article “Need for Multi Cap fund in a Portfolio”

  1. moneysights.com says:

    Trishit,

    i like your thought process on this one. You are bang-on! To put it straight, there is no need to have this demarcation & “sticking” to it by “justifying” it as a “required for diversification”.

    To go a little deep – if you already have 1 or 2 large+mid cap funds & 1-2 mid/small cap funds, isn’t the need for diversification is solved for?? People in financial services like to “invent” terms first & then to ride on those terms products are designed. This is useless confusion. In plan & simple language, fund manager can say whether its going to no-holds barred fund management or focussed. But they don’t.

    If you look at moneysights recos, we never say whether we can suggesting 1/2 large cap, 1 multi, or such jargonish justification. We look at user’s profile & we suggest. Most often, if the guy is aggressive, s/he will receive 1 fund which “people” call multi-cap OR will receive a balanced fund portfolio. AND NO, its not because we want to do that, its because the mother of all – “the Asset Allocation” (you may call it “jargon”) forces us to continue running algorithm till the asset allocation of the “resultant portfolio” matched the asset allocation of “user’s risk profile”.

    To sum up, keep things simple. Have an asset allocation, stick to it & DON’T bother whether its multi, large, small (value, special situations, TIGER, et al).


    Santosh | moneysights.com | making investing simple

    1. Trishit Ray says:

      Santosh,

      Tanks for your reply.When will moneysights open for investments?

      Regards,
      Trishit

      1. moneysights.com says:

        hey Trishit,

        Thanks for asking. If all goes as its going now, we will be up & running with it before tomorrow EoD :). Can inform you personally if you can ping me your email on santosh.navlani@moneysights.com

        Santosh Navlani | moneysights.com | making investing simple

  2. CodeRed says:

    As a class of funds, multi-cap funds are meant to weather all kinds of market conditions and come up winners. These funds are allowed to go anywhere across value or growth, across the spectrum of capitalization where they see returns within permitted risk levels. Value Research classifies multi-cap funds as those which have between 40 to 60 per cent of their assets in large-cap companies over the last three years.
    But, these funds are risky and depend a lot on the fund manager’s ability to take calls and get them right. Make sure you understand the risks associated with multi-cap funds before investing in them.

    Source: Value Research

    1. Trishit Ray says:

      CodeRed,

      This does not answer the question I raised.I have explained clearly what a multi cap fund is and the risk associated with it in the first paragraph.My question is the “need” part.

      “I am not questioning if one should invest in multi cap funds or not.One can and should invest according to his/her goals and risk taking ability.My question, is there any need for Multi Cap fund in one’s portfolio just for diversification’s sake?”

      And please post what you think and not what you are told.

      Regards,

      Trishit

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