Multi-cap funds have become popular among investors for their flexibility and balanced approach. A multi-cap fund is a diversified mutual fund scheme that invests in equity and equity-related instruments across all market capitalisations. As per SEBI guidelines, these funds must allocate a minimum of 25% each to large-cap, mid-cap, and small-cap stocks, ensuring a well-rounded exposure to various segments of the market. This diversification helps balance risk and reward, offering growth potential from mid and small caps while maintaining stability through large caps.
Here, we will explore the meaning of multi-cap funds, their types, benefits, and other essential aspects to help you invest wisely.
What are multi-cap funds?
Multi-cap funds are a category of mutual fund that invest across various market capitalisations, including large-cap, mid-cap, and small-cap stocks. This diverse approach allows fund managers to adapt to changing market conditions, allocating assets strategically based on prevailing opportunities. By providing a well-rounded portfolio, multi-cap funds aim to balance risk and returns, making them suitable for investors with varying risk appetites and investment horizons. This flexibility enables investors to capitalise on market trends and benefit from a dynamic investment strategy that adapts to the evolving economic landscape.
Features of a multi-cap fund
Characteristic |
Description |
Management |
Multi-cap funds invest in equity and equity-related instruments across various market capitalisations. Fund managers actively seek opportunities to diversify investments to meet scheme objectives, making their role pivotal in the scheme's success. |
Risk |
Multi-cap funds inherently invest in stocks from large-cap, mid-cap, and small-cap companies, thus carrying more risk compared to large-cap schemes, which predominantly invest in established large companies. |
Horizon |
Multi-cap funds typically maintain a long-term investment horizon. Investors with an objective of wealth creation over the long term and a moderate risk tolerance may find multi-cap mutual funds suitable for their investment goals. |
How does a multi-cap mutual fund work?
By law, mutual funds must adhere to specific investment strategies. For instance, a large-cap fund is restricted to investing in the equities of the top 100 market capitalisation companies, while small-cap funds focus on those below the 250 mark, and so forth.
In contrast, the multi-cap category lacks a regulatory framework dictating the size and sector of companies it can invest in. Consequently, these funds allocate investments across large, mid, and small-cap equities, with the proportions subject to change at the discretion of fund management.
Fund managers evaluate market conditions and adjust the allocation of large-cap, mid-cap, and small-cap companies in a multi-cap mutual fund's portfolio accordingly. During periods of economic expansion, managers may increase exposure to mid-cap and small-cap stocks to harness their rapid growth potential. Conversely, during economic slowdowns, they might bolster exposure to large-cap stocks.
Why should you invest in multi-cap funds?
Here are some key points explaining why you should consider investing in multi-cap funds:
- Diversification: Multi-cap funds provide exposure to companies across different market capitalisations, offering diversification within a single fund.
- Flexibility: These funds allow fund managers the flexibility to adjust allocations across large-cap, mid-cap, and small-cap stocks based on market conditions.
- Growth potential: By investing in companies of varying sizes, multi-cap funds can capture growth opportunities across different segments of the market.
- Risk management: The diversified nature of multi-cap funds can help mitigate risk compared to investing solely in one segment of the market, such as large-cap stocks.
- Long-Term investment: With a long-term investment horizon, multi-cap funds are suitable for investors looking to create wealth over time while accepting moderate risk levels.
- Active management: Fund managers actively manage multi-cap funds, aiming to identify undervalued stocks and capitalise on market trends to enhance returns.
- Market participation: Investing in multi-cap funds allows investors to participate in the entire spectrum of the equity market, from large, established companies to smaller, emerging ones.
Types of multi-cap funds
Multi-cap funds can be classified into three types based on their investment strategy:
- Large-cap focused multi-cap funds: These funds allocate more than 25% of their assets to large-cap equities. They are useful for adding stability and balance to a portfolio, especially when markets are falling.
- Mid-cap focused multi-cap funds: With a more aggressive strategy and larger exposure to mid-cap and small-cap equities, these multi-cap funds aim to generate strong returns.
- No specific focus multi-cap funds: Apart from the mandated 25% investment in each capitalisation, these multi-cap funds do not target any specific categories. Fund managers concentrate on firms that have the potential to outperform and invest in shares across all sectors.
