Equity mutual funds are categorised into different types based on the market capitalisation of the stocks that they invest in. One such category is the all-cap fund. An all-cap fund consists of stocks across different market capitalisations.
In this article, we are going to explore the meaning of all-cap funds, understand the concept with an example, and take a look at the various features, objectives, and benefits of this category of mutual funds.
What is an all-cap fund?
An all-cap fund is a category of equity mutual funds where money from different investors is pooled together and used to purchase stocks from different market capitalisation segments. Typically, an all-cap fund consists of a mix of large-cap, small-cap, and mid-cap stocks. Although most funds are actively managed by experienced fund managers, there are a few passively managed options as well.
In the case of actively managed all-cap funds, the fund manager is responsible for deciding the proportion of large-cap, mid-cap, and small-cap stocks in the fund. For instance, some funds may have a greater proportion of large-cap stocks compared to the mid-cap and small-cap segments. When deciding the asset allocation mix, fund managers consider factors such as the fund’s objectives, investment style, and prevailing market conditions.
Understanding all-cap funds with an example
Now that you are aware of the meaning of an all-cap fund, let us try to understand the concept better with the help of a hypothetical example.
Assume there is a well-known asset management company (AMC). The AMC is planning to launch a new all-cap fund, aiming to invest in companies of different sizes to leverage multiple growth opportunities across the spectrum.
Once the initial subscription period is over, the fund will use the pooled money from investors to purchase stocks of large-cap, mid-cap, and small-cap companies. Let us say that the fund’s primary objective is to maximise wealth creation, even if it means taking on high risk. Since the focus is on capital appreciation, the fund manager decides to allocate assets in the following proportion:
- Large-cap stocks: 40%
- Mid-cap stocks: 30%
- Small-cap stocks: 30%
By investing almost 60% of the total assets in the mid-cap and small-cap segments, the fund manager aims to maximise capital appreciation. The remaining 40% of the assets have been directed towards large-cap stocks in a bid to maintain a bit of stability and offer protection to the portfolio during periods of high volatility.
Now, the fund manager may adjust the portfolio’s exposure by dynamically changing the asset allocation mix based on changing market conditions and investment opportunities.
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Features of all-cap funds
All-cap funds have a few key features that set them apart from traditional mutual funds. Understanding what they are is crucial for making informed investment decisions.
Investment across market capitalisations
One of the major features that distinguish all-cap funds from other mutual fund schemes is that they include companies from large-cap, mid-cap, and small-cap segments. Most other funds usually focus on either just one or two market cap categories.
Stock selection flexibility
Since all-cap funds consider all stocks irrespective of their market capitalisation, fund managers have greater flexibility when it comes to stock selection due to the availability of a larger investment universe.
Active management
Most all-cap funds are actively managed. Fund managers actively select and adjust the portfolio's holdings based on their research, experience, and market analysis.
Objectives of all-cap funds
The primary objective of all-cap funds is to reduce portfolio risk by investing in a broad range of companies. Diversification across market capitalisation can potentially reduce overall risk and the negative impact of volatility since different market cap segments may perform differently during different economic cycles or market environments.
That said, the objectives of these funds do not just end with diversification alone. In fact, all all-cap funds aim to achieve long-term capital appreciation by capturing growth opportunities from different segments of the market. Some all-cap funds may also focus on income generation in addition to capital appreciation. These funds primarily invest in large-cap stocks with a track record of distributing dividends.
Benefits of investing in all-cap funds
All-cap funds offer a host of advantages for investors. Let us explore some of the key benefits that these unique investment vehicles have to offer.
1. Better diversification
Since all-cap funds invest across market capitalisations and sectors, they tend to be better at risk diversification than regular mutual funds.
2. Enhanced exposure to growth opportunities
By including mid-cap and small-cap stocks in their portfolio, all-cap funds offer increased exposure to growth opportunities.
3. Potential for higher returns
Mid-cap and small-cap stocks have historically delivered market-beating returns, especially in the long run. By including these stocks, all-cap funds essentially increase the potential for higher returns.
4. Access to a broad investment universe
All-cap funds have a larger investment universe to choose from compared to traditional mutual funds, which often have very narrow mandates.
How to choose an all-cap fund?
As an investor, knowing how to choose a fund for your portfolio is a crucial skill you need to develop. Here are a few tips that you can use to help you select the right all-cap fund.
1. Ensure that investment objectives align with your requirements
Some all-cap funds may prioritise capital appreciation, whereas others may focus more on capital preservation. When selecting a fund, it is important to make sure that your goals, investment horizon, and risk tolerance align with the fund’s objectives.
2. Look into the investment strategy
Every all-cap fund will have its own investment strategy. For instance, some funds may use a growth-focused strategy, whereas other funds may employ a more value-focused approach. Therefore, understanding the fund’s investment strategy, stock selection approach, and risk management measures is crucial when selecting a fund.
3. Examine the fund manager’s track record
Since most all-cap funds are actively managed, you must consider the fund manager’s track record when choosing a fund. Remember to look for fund managers with a good long-term performance track record and experience navigating different market conditions successfully.
4. Focus on the expense ratios
The expense ratio is another major factor you must consider when selecting an all-cap fund. The higher the expense ratio, the lower your returns are likely to be. Therefore, it is a good idea to compare the expense ratios of different funds to ensure that you do not choose an option with excessive fees.
Potential risks and considerations of all-cap funds
If you are planning on investing in mutual funds that invest in stocks across market caps, it is not enough to merely know the benefits they offer. You must also be well-versed in the various risks associated with them. Here are some of the key risk factors:
1. Market risk
As with any market-linked investment option, all-cap funds are also susceptible to market risks. Market volatility, changing economic conditions, geopolitical developments, and regulatory events are all factors that could potentially impact the returns of the fund.
2. Concentration risk
Some all-cap funds may have concentrated portfolios focusing on just a few sectors of the economy. Such funds often have an increased concentration risk, which is the risk arising from being overexposed to a specific asset.
3. Valuation risk
Accurately determining the valuations of certain small-cap companies may be challenging due to the lack of information available. This could lead to mispricing and erroneous valuations. Since all-cap funds invest in small-cap companies, they tend to be susceptible to such valuation risks.
Key takeaways
- All-cap funds invest across market capitalisation segments and include a mix of large-cap, mid-cap, and small-cap stocks.
- Most all-cap funds are actively managed by experienced fund managers. However, some funds may also be passively managed.
- Since they invest in companies of different sizes and growth opportunities, all-cap funds tend to offer better diversification than regular mutual funds.
- Some all-cap funds dynamically change their asset allocation mix based on market conditions and investment opportunities.
Conclusion
Investing in an all-cap fund is a good way to diversify your portfolio. Since the fund consists of stocks across all three market capitalisations, you get to enjoy the benefits that come with them. However, it is important to remember that, as with any market-linked investment option, all-cap funds are also prone to market volatility. This is especially true if the fund has more mid-cap and small-cap stocks than large-cap companies. Therefore, consider investing in the fund only if you can tolerate risk and have a long-term investment horizon.
In India, the concept of all-cap funds is non-existent. Instead, we have what are known as multi-cap funds, which are very similar. Multi-cap funds share almost all the benefits and risks of all-cap funds.
If you wish to invest in multi-cap mutual fund schemes, the Bajaj Finserv Mutual Fund Platform can help. You can find more than 1,000 mutual funds from some of the leading AMCs in India on the platform. Additionally, you can also compare mutual funds with one another and use dedicated tools such as a mutual fund calculator to plan your investments better.
