A multi-cap fund is an equity mutual fund that invests your funds in distinct company stocks of distinct sizes. This kind of investment assists lower the chances of losing funds as it disseminates your investment throughout distinct types of companies.

SEBI (Securities and Exchange Board of India), on 11^th September 2020, provided guidelines on how such funds must work. They mentioned 75 per cent of the investments in multi-cap funds should be utilised for purchasing equities and equity-linked instruments. This limit further is divided as per market cap. They suggested at least 25 per cent must be invested in each of the market segments – small-cap, mid-cap, and large-cap companies. This allows you to protect your market investments on occasions when markets are unpredictable.

These multi-cap funds try to reduce the risks of investing in the stock market by spreading your money across different types of companies. Their goal is to make the market investment safer and even appreciate the investment by investing in a blend of companies. They do so by periodically adjusting the investments they have based on the economy and market movements. At times, they may invest more in specific type of companies to leverage a particular situation.

So, who must invest in such funds?

In the case you are a new investor or planning to invest for a long term, then multi-cap can be a suitable fit. For you, such funds are a prudent means to begin market investment as they are not very risky. They disseminate your funds through distinct companies, which keep your market investment safer and even handle market fluctuations better.

However, before you begin investing in multi-cap funds, there are certain consideration points you must factor in. These include –

Risks

All investments have certain risk attached and so does multi-cap funds. It is essential to keep an eye on the potential risks associated with the companies and sectors your funds are invested in. Economic conditions can change, impacting distinct kinds of companies in varying ways. By staying informed about market trends and economic shifts, you can make informed decisions and adjust your investment strategy if necessary.

Your goals

When considering multi-cap mutual funds, it is crucial to have a clear understanding of your investment objectives. Are you aiming to save for a specific future life goal like buying a home, or four-wheeler, financing higher education expenses, or building a retirement fund ? Knowing your life goals assist you line up your investment strategy accordingly. Multi-cap funds are best suited for longer-term investments of five years or more. This longer horizon allows your investment to potentially ride out short-term market fluctuations and deliver more suitable results over the long time period.

Fees

Multi-cap funds are managed by companies, and these companies charge fees for their services. These fees are typically a percentage of the amount you invest and are known as the expense ratio. It is important to understand the expense ratio because it can impact your returns over time. While fees are a necessary part of fund management, keeping them reasonable can significantly affect your investment’s overall performance. Comparing expense ratios among different funds can help you make an informed choice while keeping costs in check.

In a nutshell, multi-cap funds are a prudent investment instrument to invest in a blend of distinct company stocks to lower risks. They are good for beginners and people who want to invest for a long term. Just remember to consider your goals, risks, and fees before you start.