Strategy to balance high valuations in Mid & small caps: Go for multi-cap funds to reduce risks

financialexpress.com:

Given that the valuations of small-caps and mid-caps are elevated, investors should look at multi-cap funds to diversify across market segments and ensure some systemic risk is mitigated, say experts. The investment mandate for multi-cap funds warrants that a minimum of 25% be invested in each of the three market cap segments, irrespective of market conditions, to generate optimal returns.

Valuations of mid-cap and small-cap stocks are trading at 26 times (x) the price-to-earnings (PE) ratio based on FY24 earnings as against 21x PE ratio of benchmark Nifty. In such a scenario, multi-cap funds offer a balanced option for retail investors if they are willing to invest for three to five years.

Srikanth Subramanian, CEO, Kotak Cherry, says it is always a wise thing to keep your portfolio diversified, not only amongst asset classes but within asset class, say equity. “Multi-cap funds help solve that issue as they are able to diversify proportionately across large, mid and small-cap stocks thus reducing portfolio impact which might arise if an investor is invested only in one particular market cap category,” he says.

Similarly, Devender Singhal, executive vice president and fund manager, Kotak Mahindra AMC, says multi-cap funds often provide a more balanced and diversified option to retail investors compared to mid-cap and small-cap funds. “When the valuations of mid-cap and small-cap stocks in general are elevated, multi-cap funds provide a balanced option to invest for long-term growth,” he says.

Mandatory allocations in multi-cap funds offer investors the clarity on the minimum market-cap exposure to each segment. However, this also restricts the fund manager’s ability to go relatively underweight on the market cap segment