One of the basic equity funds that many advisers and distributors tell people to buy is a multi-cap fund. It is, in the truest sense of the word, a diversified equity fund because it aims to invest across stocks and sectors, and also in companies of different sizes: large, medium and small. But that also makes a comparison between two multi-cap funds a bit tricky. You should know that one multi-cap fund can be vastly different from another.
Divergence
How much a multi-cap fund invests in large-, mid- and small-cap companies depends on its fund manager. If the equity market has fallen a lot and is at a bottom, according to the fund manager, then she may consider increasing the scheme’s exposure to small- and mid-cap stocks. Typically, when equity markets rise, the small- and mid-caps rise first and faster. But if equity markets have risen enough already and valuations seem expensive—like many experts describe the current market situation as—then typically multi-cap fund managers tilt their portfolios towards large-cap stocks. Some fund managers may even avoid small-cap stocks altogether or keep their exposures low.
