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Multicap MFs
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Many newcomers to the stock market are a bit confused as investment experts are asking them to park money in multi-cap mutual fund schemes rather than advocating the traditional combination of large-cap plus small and mid-cap schemes.
Experts say that they are recommending multi-cap schemes as most investors fail to review their mutual fund holdings regularly and take timely actions. It is better to leave the task to a well-informed fund manager, they say.
Advisors typically ask investors to go for multi-cap after huge gains in small and midcap segments. They believe that investors won't be able to take a call on these sectors and a fund manager will be in a better position to judge whether to increase or cut down exposure to these segments.
However, a proper approach would be to consider the investment corpus and the risk profile of the investor before suggesting a scheme.
I think most investors are not very good at deciding what should be their exposure to large-cap schemes or small and mid-cap schemes. Most of them also don't know when to rebalance their portfolio. In such cases a multi-cap scheme would be ideal as a fund manager would take the decision of getting in and out of sec tors. It also helps to reduce tax burden as you don't have to incur short-term capital gains otherwise you would pay for rebalancing your holdings by selling a scheme before a year.
For example, an investor decides to invest 70% of the corpus in a large-cap scheme and the remaining in small and mid-cap schemes. If the mid and small-cap scheme has gained quite a bit (as it has happened in the last year), an investor should ideally book profit and reallocate the money to the large-cap scheme so that his portfolio allocation is maintained.
However, most investors fail to rebalance their portfolio, say investment advisors.
The different nomenclatures in the mutual fund space can be a bit misleading. There are large-cap schemes, large-cap schemes with mid-cap exposure, multi cap schemes, small and midcap schemes... it can be very confusing for a new investor, especially if the person is not familiar with the market. Clearly, there are midcap schemes and very few large-cap schemes, but the majority of the schemes are diversified schemes. One should focus on the investor to get the allocation right.
For example, if the new investor has a small corpus or intends to start a systematic investment plan (SIP) of 1,000 or 2,000, the person would be better off in a diversified fund.
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