A multi-cap fund is a type of investment fund that allocates its assets among large-, mid-, and small-cap stocks of companies with different market capitalisations.
This diversified approach aims to achieve higher returns by balancing risk through strategic investments in companies of different sizes, offering investors a well-rounded portfolio.
The multi-cap funds in India reflected a significant growth pattern in the first six months of 2024, during which their AUM showed a marked increase of 30%. It increased to 1.54 lakh crore in June from about 1.18 lakh crore in January. This growth can be partly attributed to its resilience in adverse market conditions and relatively consistent benefits.
Multi Cap Funds: How Do They Work?
A multi-cap fund is a mutual fund that invests in large, mid-cap, and small-cap stocks. Its diversity and risk management provide growth prospects in various market areas.
Large-cap equities, for instance, offer consistency, reliable returns, and reduced volatility. On the other hand, because they are located in developing industries, mid-cap companies carry a larger risk but also have greater growth potential. In a multi-cap fund, this combination aids in balancing risk and return.
How Multi-Cap Funds Invest Across Different Caps?
Multi-cap funds are unique in their approach to investing. As the name suggests, they invest across various market capitalisations, including large-cap, mid-cap, and small-cap stocks. This diversification allows fund managers to capitalise on growth opportunities across different market segments.
SEBI mandates that multi-cap funds must adhere to the following allocation guidelines:
- Minimum 25% in large-cap stocks
- Minimum 25% in mid-cap stocks
- Minimum 25% in small-cap stocks
However, fund managers can adjust these allocations within the specified limits, depending on market conditions and their investment strategy.
By investing across different market capitalisations, multi-cap funds aim to:
- Diversify Risk: Spread investment risk across various sectors and market segments.
- Capture Growth Opportunities: Benefit from the growth potential of established large-cap companies and emerging mid-cap and small-cap companies.
- Adapt to Market Cycles: Adjust the portfolio allocation to capitalise on changing market conditions.
It’s important to note that the exact allocation to each market capitalisation may vary from fund to fund, depending on the fund manager’s investment philosophy and market outlook.
Large, Mid, and Small-Cap Stocks: A Quick Primer
Market capitalisation is one of the most critical metrics for classifying companies into large-cap, mid-cap, and small-cap categories.
| Large-Cap | Issued by large, well-established companies with substantial market capitalization | Moderate | Low |
| Mid-Cap | Issued by companies that are larger than small-cap companies but smaller than large-cap companies | High | Moderate |
| Small-Cap | Issued by smaller companies with relatively low market capitalization | Very High | High |
How They Offer Different Growth Rates
- Large-Cap: These firms are usually mature and less likely to grow; however, they are very stable and consistent in delivering returns.
- Mid-Cap: These companies are growth firms and, hence, have every possibility of outperforming large-cap companies in the long run. However, they are also more volatile.
- Small-Cap: These firms have the highest growth prospects because they are often early in the growth cycle. However, they are the most volatile.
Key Features of Multi-Cap Funds
Multi-cap funds offer several key features that make them an attractive investment option. These funds provide a balanced approach to investing by spreading risk across different market capitalisations.
- Diversification Across Market Capitalisations: Multi-cap funds lower the total risk of their portfolios by purchasing equities from several market segments, including large, mid-, and small-cap stocks. This diversification approach lessens the effects of market fluctuations.
- Flexibility in Asset Allocation: Fund managers can allocate the portfolio to various market categories depending on market trends and investment possibilities. This flexible strategy allows the fund to adjust to new trends.
- Active Management: Skilled fund managers actively choose and oversee the investments in the fund to outperform the benchmark index. They use a range of tactics to produce higher returns, including sector rotation, market timing, and stock selection.
Types of Multi Cap Funds
Multi-cap funds come in different flavours. Each type of fund has its investment strategy and risk profile. Understanding the different types can help you make the right choice for your investment goals:
- EquityMulti-Cap Funds: These funds invest heavily in equities across different market capitalisation circles. They bring much higher returns but with relatively higher risk. They are ideal for investors who can afford to take a higher level of risk with a long-term investment horizon.
- Hybrid Multi-Cap Funds: These funds are mostly equity and debt instruments, offering a balance of risk and returns. They would suit investors seeking a moderate level of risk and a blend of capital appreciation and income generation.
- Sector-specific Multi-Cap Funds: Such funds give exposure to specific sectors like technology, healthcare, or financials. If the target sector performs well, it may yield better returns than other schemes. However, at the same time, it tends to become more vulnerable to risks related to sectors.
The different types of multi-cap funds will enable you to make the right investment decision at a given point in time based on your risk appetite and financial goals.
Benefits of Investing in Multi Cap Funds
Multi-cap funds have various advantages that can help you reach your financial goals. First, they diversify the portfolio and offer the possibility of long-term growth. More importantly, these funds are professionally managed.
- Risk Allocation through Diversification: Multi-cap funds invested in a diversified portfolio help spread the risks and thus reduce the shock of market volatility.
- Growth Potential: Such funds offer scope for long-term capital appreciation by investing in high-growth stocks across various market segments.
- Access to Multi-Market Segments: Multi-cap funds expose investors to a wide range of stocks, from the most established large-cap corporations to smaller and mid-cap stocks with growth potential.
Risks of Multi Cap Funds
While Multi Cap Funds offer several advantages, it’s important to know the potential risks associated with them:
- Market Risk: Multi-cap funds are affected by market fluctuations, and their performance may vary depending on overall market conditions. A downturn in the stock market can negatively impact the fund’s performance.
- Fund Manager Risk: It’s completely dependent on the experience of the concerned person in control of fund management. A change in the investment decision can adversely affect the fund’s returns.
- Liquidity Risk: Some small-cap stocks in multi-cap funds may have lower liquidity, making it difficult to buy or sell shares quickly. This affects the fund’s ability to meet redemption requests, especially during market stress.
Who Should Invest in Multi Cap Funds?
Multi-cap funds are apt for those with an intermediate to high-risk tolerance and a long-term horizon. They are designed for those who want some diversity with the possibility of mass returns.
These kinds of funds become versatile and could prove suitable for nearly all investors, but are ideal for those who have some or all of the following characteristics:
- Moderately to Highly Risk Tolerant: Multi Cap Funds will invest in large, mid, and small-cap stocks. While diversification can take away a good amount of risk, the volatility in market behaviour makes this investor more vulnerable.
- Long-Term Investment Horizon: Long-term investment is the only way a person can gain from multi-cap funds. Variations in short-term market behaviour are unlikely to cause much difference if the investment is held for an extended period.
- Looking for Diversification: A multicap fund can help an investor gain exposure to companies spread across market capitalisation, limiting the impact of a downturn in any specific sector.
- Seeking Professional Management: The professionals who manage multi-cap funds are highly experienced and constantly monitor market trends, making informed investment decisions.
If you fall into any of these categories and are comfortable with the risks they pose, a multi-cap fund could certainly be added to your portfolio.
Top 5 Performing Multi-Cap Funds (Last 10 Years)
Here are some of the top multi-cap funds that have demonstrated strong performance and are worth considering for your investment portfolio:
| Fund Name | 10-Year XIRR (%) |
| Quant Active Fund | 24.4 |
| Nippon India Multi Cap Fund | 21.98 |
| Invesco India Multi Cap Fund | 20.66 |
| Baroda BNP Paribas Multi Cap Fund | 20.48 |
| ICICI Pru Multi Cap Fund | 20.06 |
Note: Past performance is not indicative of future results. Thorough research or consulting with a financial advisor is essential before making any investment decisions.
Are Multi Cap Funds Right for Your Portfolio?
Multi-cap funds can be a worthwhile investment to help balance risk and return in a diversified portfolio. However, in-depth research about this fund is strictly required before investing in it.
These types of investments involve risks. Any investment made through mutual funds will include some risk, and it is wise to seek advice from a financial advisor before making any investment.
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