Is it better to invest in multi-cap funds or separately in large, mid and small cap funds?

Dhirendra Kumar says why a regular investor should choose multi-cap funds over the other options

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Is it better to invest in multi-cap funds or separately in large, mid and small cap funds?

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If you are able to spot a wise fund manager, it is good to put your money in a multi-cap fund. At times, your portfolio will require rebalancing. Markets are cyclical between their components. Sometimes large caps do well, sometimes mid caps and sometimes small caps. When the markets correct, small caps crumble and midcaps struggle but large caps prove to be more resilient. If you have a multi-cap fund, you will have exposure to companies of different sizes and you will be reasonably diversified with simplicity.

Three years ago, if you had invested a third of your money in large cap, mid cap and small cap, your small cap money would have doubled and your large cap money would have gone up 1.5 times. This will tempt you to invest in mid/small caps. But when 2008 happened, the mid/small cap funds went down by 70-80%. The large cap funds, on the other hand, went down by 40-45%, losing you less money.

If you are able to spot a good fund manager, give your money to a multi-cap fund. If you choose to invest in a mid/small cap fund you have to rebalance yourself or invest through the lean times as well as times of plenty. If you want to be an aggressive investor, have an allocation to small and mid cap funds. But be prepared to absorb the extreme volatility that you will see here. For most ordinary investors who are seeking diversification with simplicity, multi-cap is the way to go.

This question was answered in July 2017.

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