A multi-cap fund is a type of equity mutual fund that invests in stocks across market capitalisation. Multi cap funds, according to the definition by the Securities and Exchanges Board of India (Sebi), should allocate a minimum of 25 per cent each in large-, mid-, and small-cap category.
This minimum allocation reduces the fund manager’s discretion. This type of fund can go overweight in any category as long as the minimum allocation of 25 per cent is maintained. They can also invest that in debt and money market instruments. Additionally, they can invest up to 10 per cent in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).
As of July 31, 2023, the Association of Mutual Funds in India (Amfi) lists 14 funds in the multi-cap category on its website. Over the one-year and three-year periods, ending on the same date, the average returns for the category have been 23.57 per cent and 30.3 per cent, respectively. Six funds have outperformed the one-year average.
Nippon India Multi Cap Fund leads the one-year returns with an impressive 32.11 per cent return, followed closely by HDFC Multi Cap Fund at 31.89 per cent and Kotak Multicap Fund at 30.62 per cent. In the three-year returns category, Nippon India Multi Cap Fund retains the top spot with an outstanding 40.10 per cent return, followed by Mahindra Manulife Multi Cap Fund with 32.07 per cent and ICICI Prudential Multicap Fund with 29.37 per cent.
The minimum and maximum allocation criteria across categories in multi-cap funds help maintain even participation, providing diversification across large-, mid-, and small-cap stocks. This balanced approach offers a dynamic option for investors, effectively managing both risk and reward. This helps in optimising returns and navigating market fluctuations effectively.
By definition, large-cap stocks are the top 100 stocks by market cap, which, thus, come with lower risk. Mid-cap stocks (next 150 stocks in terms of market cap) offer reasonable valuations, and small-cap stocks (stocks ranked after top 250) present higher risk with greater potential for alpha.
This balanced approach makes multi-cap funds a dynamic choice for investors. Different industries have different representation across market caps with some industries having no representation in large cap segment. Hence, it’s wise to consider participation both in large-cap and non-large cap segments.
Investors should carefully assess their financial goals and risk tolerance before investing in multi cap funds.
While multi-cap funds reduce the fund manager’s restrictions and human judgemental errors, the specific allocation restrictions across market caps may impact their capacity to create alpha. Relying heavily on mid-cap and small-cap stocks for growth could pose risks, as these segments are considered riskier compared to large-caps.
There are other categories, such as flexicap funds that allows more flexibility. Fund managers can invest across large-, mid-, and small-cap stocks, offering complete freedom in allocation decisions. But as a category, multi-cap funds show better returns than flexicap funds both in terms of one-year and three-year returns.
Overall, multi-cap funds provide investors with the flexibility to invest across large-, mid-, and small-cap stocks, but careful consideration of individual risk profiles is essential before making investment decisions.