What are Multi-cap Funds – A Complete Guideline

Multi-cap funds are those equity mutual funds that do not focus on a particular capitalization of companies but are exposed to all sectors and capitalizations. This makes them more diverse and provides balanced exposure to all sizes of company stocks. It also eliminates the need for investors to invest in multiple funds of different caps by allocating one fund’s corpus to large, medium and small-capitalization equities.

Asset Allocation and Investment Strategy of Multi-cap Funds

The Securities and Exchange Board of India (SEBI) has norms for all kinds of mutual funds and funds must stick to stocks that are defined for their portfolio. For instance, large-cap funds have restriction mandates to invest largely in large capital stocks. Similar constraints are there for mid-cap or small-cap funds. However, with multi-cap funds, the fund assets can be allocated in varying proportions to stocks of all capital sizes. Multi-cap funds must allocate 75% of the fund’s corpus in equity and equity-related instruments, with 25% in each of the large, mid, and small caps.

Here, fund managers have an opportunity to expose the fund assets to large-cap stocks for stability as well as invest in mid-cap and small-cap equities for growth potential. The underlying stocks can realize their value in the bull market where the fund manager will try to tap the growth opportunities of small and medium-sized companies. Similarly, they can keep their bias towards large-cap stocks to take shelter when the market tends to get bearish. They can increase or decrease holdings by small margins in each capitalization as per the market trends, maintaining 25% of the fund allocation in each cap.

Risks and Returns

The multi-cap funds are known to have a moderate risk-return profile. They can outperform the large-cap and mid-cap funds when markets are rising. They also withdraw good returns from small-cap stocks during market rallies. But when markets are down, large-cap funds can provide the cushioning to stop the returns from getting eroded and being negatively impacted. They are less volatile than mid-cap funds in the long run but riskier than large-cap funds. Fund managers also have the leeway to allocate more fund resources to a certain capitalization according to the market movements.

However, these funds are subject to enough volatility because, at any given point, they have 50% exposure to mid-cap and small-cap stocks. Even if the fund managers can alter the asset allocation when they see a prolonged bearish market, they cannot reduce it below 25% to any segment of the capitalizations.

Types of Multi-Cap Funds

Multi-cap funds can be great wealth creators in the long run as they can take advantage of the investment opportunities across the market. Based on their larger exposure to a certain segment of the capital market, they can be classified as:

  1. Large-cap Focussed Multi-cap Funds

Such multi-cap funds focus more on large-cap stocks, allocating more than 25% to them. These funds are good to provide stability and balance to the portfolio especially when markets are running down. They first secure the portfolio through large-cap stocks and then explore the mid-cap and small-cap growth opportunities.

  1. Small/Mid-Cap Focussed Multi-cap Funds

These multi-cap funds have a more aggressive approach with larger exposure to mid-cap and small-cap stocks to earn high returns on them. The large-cap stocks are only meant to counterbalance the downside.

  1. No Specific Focus Multi-cap Funds

Apart from keeping the mandatory investments of 25% of the assets in each capitalization, these multi-cap funds do not target any specific segments. Fund managers focus on stocks that can outperform and invest in equities pan all sectors.

Who Should Invest?

Equity investors are advised to invest for the long term but only in those equity funds that suit their goals and risk appetite. Investors should invest in multi-cap stocks for the following reasons:

  • If you have a moderate risk tolerance, then you may invest in multi-cap funds
  • Investors with an investment horizon of a minimum of 5 years, and better with 5+ years investment period, may invest in these funds
  • If you seek comprehensive market coverage through one fund instead of investments in multiple funds. Also, the beginners and new investors who want have a tough time deciding which particular capital segment to go for, can invest in this fund
  • If you want wealth creation along with a diversified portfolio to make the best of all capitalization segments, you can invest in multi-cap funds as they have an increased exposure to mid-cap and small-cap stocks in a robust market environment to benefit through good returns. Similarly, they can expose more of the investors’ money to large-cap stocks to protect the earnings when economic situations are harsh

Wrapping it up:

Multi-cap funds are equity funds that allocate 75% of the fund assets to equities and related instruments, with at least 25% in each of the large, medium, and small capitalizations as per the SEBI mandate. This fund stands out due to its flexibility and diversification across all sectors and capitalizations. If you invest in mid-cap funds, you may need to stay invested in medium-sized stocks even when the markets underperform. Similarly, with large-cap funds, you cannot make the best use of the potential of small and medium-sized companies when markets are favorable. But, multi-cap funds provide a perfect blend of all capital markets that allow you to earn good interest balancing the risks and returns.

FAQs
Are multi-cap funds the same as Flexi-cap funds?
No, multi-cap funds are not the same as Flexi-cap funds, even if both funds invest in all segments of capitalizations and can fluctuate the asset allocation to each. Multi-cap funds must maintain at least 25% of the fund’s investments in each of the large, mid, and small caps. Flexi-cap funds have no such mandate to follow and are more flexible than multi-cap funds.
Should novice investors invest in multi-cap funds?
Yes, novice investors may invest in multi-cap funds as this gives them a chance to capitalize on all sizes of stocks having a blend of it in one diverse portfolio. This balances the risk and returns, where the large-cap stocks balance the negative impact when there is a slump and mid-cap/small-cap stocks provide growth. They give high returns with subdued market risks.
Why not invest in one capitalization rather than multi-cap funds?
All kinds of funds come with their sets of pros and cons. Single capitalization focussed equity funds can tap the risks and returns of one capital market. On the other hand, multi-cap funds invest across all capitalizations to tap the risk-returns profile of all capital markets. They can provide good returns by hedging the risks. New investors may switch to a single capitalization fund like a large-cap fund or mid-cap fund once they get a hang of markets.
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