Mid-cap and small-cap funds are among the most sought-after mutual funds. However, their high volatility is a problem. In this video, we find out if multi-cap funds can be a better way to invest in mid and small caps.

Multi-cap funds are required to invest at least 25% of their assets each in large, mid and small caps. So, at any point, they have 50% assets invested in mid and small caps. Their large-cap exposure helps provide the required stability. So, multi-cap funds can be both rewarding and less volatile.

Few other diversified categories provide this return mix. For example, flexi-cap funds tend to be large-cap heavy and large & mid-cap funds tend to be underweight in small caps. So, multi-cap funds are in a distinguished position.

But the analysis of multi-cap funds is not easy as they came into being only in 2021. They have an interesting history that you can learn more about in the video. So, to analyse these funds, we had to create a multi-cap fund. We did so by taking the Nifty 100, Nifty Midcap 150 and Nifty Smallcap 250 total-return indices and then allocating assets to them as per the asset allocation of multi-cap funds over the last 2 years. We also rebalanced the resulting proxy multi-cap fund on a yearly basis.

We then compared the performance of this proxy multi-cap fund with the mid-cap and small-cap indices. The comparison revealed that not only did the proxy multi-cap fund do considerably well on the returns front but it also offered less volatility and better downside protection.

Though the study had its limitations, it can be concluded that multi-cap funds can be a good way to invest in mid and small caps. Plus, they can also take care of asset allocation across market caps.

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