Market capitalization is a crucial consideration for aware investors. It helps them create a best-fit investment portfolio according to their specific needs.
Similarly, multi-cap mutual funds are designed to fulfil such specific needs of investors. This post will discuss various aspects of multi-cap funds including their types, benefits, risks & much more.
What Are Multi Cap Funds? Meaning & Explanation
Generally, there exist large-cap, mid-cap and small-cap companies based on their market capitalization.
|Large Cap Companies||More than 20000 Cr|
|Mid Cap Companies||Between 5000-20000 Cr|
|Small Cap Companies||Less than 5000 Cr|
A mutual fund that invests across different market capitalizations, from large-cap to small-cap, is called a multi-cap mutual fund.
According to SEBI guidelines, a multi-cap fund must hold at least 75% of the assets in equities & equity-related instruments. Moreover, it must invest 25% of its assets in small-cap, 25% in mid-cap and 25% in large-cap companies.
Note! The actual allocation of assets to different capitalization categories may vary from fund to fund.
Types Of Multi-Cap Funds
Multi-cap funds have multiple types based on portfolio composition as follows.
1. Large-Cap Focused Multi-Cap Funds
These schemes dominantly invest in large-cap stocks besides adhering to the predetermined allocations of different market capitalizations.
2. Small/Mid-Cap Focused Multi-Cap Funds
These funds aggressively invest in small/mid-cap stocks besides fulfilling the prerequisites.
3. No Specific Focus Multi-Cap Funds
These funds may act opportunistically and do not focus on any specific market capitalizations.
Multi Cap VS Flexi Cap Funds
Both multi-cap and flexi-cap funds have a single purpose of investing across all market capitalizations but there are some differences between the two. Read the following points for a clear explanation.
A. Regulatory Guidelines: Multi-cap funds are required to invest 75% of the assets in equities and equity-related instruments with a set allocation of 25% to each market capitalization (large, mid & small cap).
On the other hand, flexi-cap funds are required to invest 65% of their assets in equities and equity-related instruments but they are not required to invest a minimum percentage of their assets in each capitalization category.
B. Allocation Flexibility: Multi-cap funds have predetermined guidelines about allocation towards each market cap category. Hence, they do not have much flexibility in terms of asset allocation.
In contrast, flexi-cap funds do have the flexibility to adjust their allocation to different market capitalizations based on market conditions and opportunities. This is one of the reasons they are called flexi-cap funds.
Multi-Cap Growth Vs Direct Plan
Growth plans and direct plans in multi-cap mutual funds refer to two different ways to invest in these funds. The main factor that makes them different is their expense ratios.
The expense ratio is a fee charged by mutual fund companies to cover the costs of managing and operating the mutual fund.
Direct Plans are directly sold by the mutual fund company without any involvement of a broker or distributor. It saves investors money due to the absence of commissions or sales charges.
Growth Plans are sold through brokers and distributors. As a result, a commission or sales charge is added to the NAV of the fund. This makes growth plan expensive than direct plans.
NAV (Net Asset Value) in a mutual fund is the per-unit price of the fund's assets minus liabilities, representing the value of each share in the fund.
Advantages Of Multi Cap Funds
If we talk about some of the advantages of multi-cap funds, here below are discussed some.
- Multi-cap funds by their design provide us with diversification.
- Diversification can help spread risk across different stocks and sectors.
- These funds have the flexibility to leverage market opportunities with the free 25% allocation of assets.
- By investing in companies of different sizes, these funds have the potential to capture growth opportunities.
Disadvantages Of Multi Cap Funds
It is necessary to have a look at both sides of a coin. Let’s discuss some of the disadvantages of multi-cap funds.
- These funds may show more volatility compared to other categories of mutual funds.
- Multi-cap funds may have higher fees than other mutual funds because fund managers have to do more work to manage the diversified portfolio.
- The success of multi-cap funds highly depends on the manager’s strategy of selecting stocks. Hence, these funds are subject to management risk.
Factors To Consider
Investors should consider some important points before investing in multi-cap funds.
- Investment Objective
- Risk Tolerance Level
- Time Horizon of Investment
- Asset Management Company & Its Reputation
- Fund Selection
- Fund Manager’s Experience & Expertise
- Associated Risks
- Past Performance
- Costs & Expense Ratios
Related Read: How to Select the best mutual fund
How To Invest In Multi-Cap Funds
With so many online investment platforms, investing in multi-cap funds is a few clicks away.
- Register with any reputed online investment platform
- Open an account & complete KYC
- Research & select fund
- Choose the mode of investment i.e. lumpsum or SIP Investment
- Make the payment
- Review the performance periodically
Are Multi-Cap Funds Good?
There is no general answer to this question. It can be decided based on an investor’s investment goal, risk tolerance, financial conditions etc.
Who Should Invest In Multi Cap Funds?
Multi-cap funds are considered moderately risky investments. So, as a general understanding, investors who are okay with a moderate level of risk and have a long-term investment horizon can bet on them.