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Multi-cap funds invest in small, mid and large-cap stocks2 under one portfolio. These allocations must be a minimum of 25% for each cap - per SEBI guidelines and are handled by fund managers. While multi-cap is good for diversification and long-term wealth creation, it can be risky in the short term.
Diversification is key when looking into investment plans and options, and one of the most versatile investment categories under mutual funds is multi-cap funds. This type of fund allows investors to invest in equity and equity-related stocks2 of companies with varying market capitalisations.
In simple terms, multi-cap mutual funds let you invest your money in small, mid and large-cap company stocks - to varying degrees, under a single portfolio.
So whether you are a seasoned investor looking to optimise your portfolio or a beginner seeking a balanced approach, a multi-cap mutual fund is worth considering. Read on to learn more about these funds and how you can start your investment journey with them!
What is a Multi-Cap Fund?
Multi-cap funds are a category of mutual funds that allow you to invest in small, mid and large-cap company stocks under one portfolio. They are diversified equity funds that allow you to invest in different market capitalisations, leading to a more balanced and diversified portfolio.
The fund manager handles the investments in varying proportions to meet the fund's investment objectives, i.e., the fund manager decides how much money to invest in each market cap - small, mid, and large.
How do Multi-Cap Funds Work?
The Securities and Exchange Board of India (SEBI) has issued clear guidelines for asset allocation for each mutual fund category.
For example, large-cap funds must invest in stocks of the top 100 companies based on market value. Similarly, small-cap funds can only invest in companies/firms ranked below the top 250.
Multi-cap funds can invest in all three cap segments (large-cap/mid-cap/small-cap) and must hold at least 75% of their assets in equity and equity-related instruments at all times. This means the fund managers must allocate at least:
- 25% of its total assets to large-cap stocks.
- 25% of its total assets to mid-cap stocks.
- 25% of its total assets to small-cap stocks.
This minimum percentage of allocation must be maintained at all times across these market caps. A fund manager maintains these allocations. Investors cannot control it.
Types of Multi-Cap Mutual Funds
Multi-cap mutual funds can be of three main types based on their asset allocation focus:
Multi-Cap Funds that Focus on Large-Cap Stocks
They secure your portfolio by investing heavily in the large-cap segment while exploring avenues in the mid/small-cap sectors. They provide more stability and are good when the market is slow/down.
Multi-Cap Funds that Focus on Mid-Cap Stocks
They look for investment avenues in small/mid-cap stocks and look at large-cap stocks only to safeguard the investment from market volatility and downsides.
Multi-Cap Funds that Focus on Small Cap Stocks
Apart from maintaining the minimum 25% segment allocations, they do not target any specific segments. These schemes focus on stocks across all segments that can give good returns.
What are the Benefits of Investing in Multi-Cap Funds?
- Lower Risk Through Portfolio Diversification: Since multi-cap mutual funds invest across all market segments and in companies regardless of size, they offer a diversified portfolio.
This approach spreads your investments and risk across the market, as different parts of the market perform differently at a given time. This can provide some cushioning against market volatility, minimising your losses.
- More Exposure to Key Sectors of the Economy: Multi-cap funds are not restricted to a particular market cap or sector.
As an investor, you get exposure to all the key sectors and companies through them to companies driving the Indian economy. As a result, you do not miss out on any opportunity in the Indian market.
- Right Portfolio for the Prevailing Market Condition: The flexibility of allocations between large, mid and small-cap allows funds to change their portfolio composition to best suit the market condition.
For example, fund managers can focus more on mid-cap and small-cap stocks when the economy is booming and large-cap stocks during a slowdown.
Risks Associated With Multi-Cap Mutual Funds
Multi-cap markets can be volatile in the short term. They invest in large, mid and small-cap stocks. Hence, these funds carry more risk as they have at least 50% exposure to small and mid-cap stocks at any given point, which is risky in the short term.
Moreover, fund managers of multi-cap schemes continually seek opportunities in small and mid-cap segments to increase earnings. This can be good and bad both, as it can boost earnings but increases the volatility of the scheme.
Also, a prolonged slowdown in the economy due to world events, financial crises, etc., could adversely impact its growth.
5 Best Multi-Cap Mutual Funds
Multi-Cap Fund Name |
3-Year Return (%) |
5-Year Return (%) |
Nippon India multi-cap Fund Direct-Growth |
39.71% |
18.73% |
Quant Active Fund Direct-Growth |
34.42% |
24.60% |
Mahindra Manulife multi-cap Fund Direct-Growth |
33.37% |
21.53% |
ICICI Prudential Multicap Fund Direct Plan-Growth |
30.39% |
15.02% |
Baroda BNP Paribas multi-cap Fund - Direct Plan-Growth |
29.03% |
17.03% |
Disclaimer: These rates were taken from Money Control on 26/09/2023 at 02:08 P.M. Please note fund return rates are subject to change in accordance with market volatility and prevailing tax laws. Always check official sources and current market rates before making any investments.
Conclusion
Overall, multi-cap mutual funds have a moderate risk-return profile and benefit first-time investors or those interested in long-term wealth creation. This investment approach lets you leverage your investment opportunities across the market.
Simply put, diversification is vital as it helps minimise large losses. Therefore, consider opting for other investment plans in addition to a multi-cap fund, as it will help spread your investments across different assets.
This way, you are less likely to lose your portfolio to one negative event impacting a single holding.
