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    Multi Cap Funds – Multi Cap Mutual Funds to Invest in 2023

    Multi Cap Funds

    Multi-cap funds have gained immense popularity since they were re-defined by SEBI in 2020. Find the suitable multi-cap equity funds and other important points here.

    What are Multi Cap Funds?

    Multi-cap funds are open-ended funds investing at least 75% into equities and equity-related instruments. However, a minimum of 25% is invested in large-cap, mid-cap, and small-cap equities.

    What are large-cap, mid-cap, and small-cap companies?

    As per SEBI, large-cap companies are ranked 1-100 on the stock exchange based on their market capitalization. Mid-cap companies are ranked 101-250, and small-cap companies are 251 and above. This list is updated every 6 months and can be found on the Association of Mutual Funds of India (AMFI) website.

    Thus, multi-cap equity funds aim to gain similar exposure to equities across market capitalization for its investors.

    Multi-cap Funds Vs Flexi-Cap Funds

    Investors often get confused between a multi-cap fund and a flexi-cap fund. This is because, before September 11, 2020, they both meant the same thing. However, two circulars, dated September 11, 2020 (asset allocation of multi-cap funds) and November 6, 2020 (introduction of Flexi-cap Funds), made a clear distinction between the two.

    Let’s look at the key differences.

    Differences

    Multi-cap Funds

    Flexi-cap Funds

    Definition

    An equity fund that invests predominantly in large-cap, mid-cap, and small-cap equities with a minimum asset allocation of 25% each.

    An equity mutual fund that invests across market capitalizations with no minimum asset allocation into any one type.

    Asset Allocation

    Minimum 75% into equities and equity-related instruments.

    1. Minimum 25% into Large-cap Equity

    2. Minimum 25% into Mid-cap Equity

    3. Minimum 25% into Small-cap Equity

    Minimum 65% into equities
    No minimum cap on any one type of market capitalization

    Volatility and Return Potential

    Comparatively more volatile but also higher return potential

    Comparatively less volatile albeit lower return potential

    Suited for

    Aggressive Investors

    Moderate to Aggressive Investors

    Who Should Invest in Multi-cap Equity Funds?

    • • First-Time Mutual Fund Investors

      First-time mutual fund investors can benefit from multi-cap equity funds that expose them to equities across market capitalizations in similar proportions. With each of these market caps differing in terms of risk profile and return potential, it allows the investor to build a well-rounded portfolio from scratch. .

    • • Investors Looking for Diversified Equity Exposure

      Not all types of equity are the same regarding their risk profile and return potential. For instance, small-cap equities may give you a high return potential but come with very high risk. On the other hand, large-cap equities are known for their lower-risk, albeit low-return potential. Multi-cap mutual funds allow you to get diversified equity exposure by investing across market capitalization. The minimum asset allocation of 25% into each market cap potentially hedges your risk while optimizing your return potential.

    • • Equity Investors Looking to Balance their Risk

      A small-cap fund may be better suited for aggressive investors open to taking considerable risks. With a multi-cap fund, you can balance your risk by investing a minimum of 50% into mid-cap and large-cap equity.

    • • Investors with a Long-term Horizon

      Equity, as an asset class, is known for being volatile. While a bull phase could appreciate your portfolio's value very quickly, a bear phase could also cause a considerable dent. And as you know, markets regularly go through ups and downs. Therefore, when you invest in equity funds, including multi-cap funds with a longer time horizon, you put yourself in a better position to ride through the short-term market volatility. Thus, an equity fund like a multi-cap mutual fund is best suited for those who can stay invested for 5 years or more.

    How to Invest in Multi-cap Funds?

    Investing in the top multi-cap funds is easy. Just zero in on the right fund, choose between IDCW (Income Distribution cum Capital Withdrawal) and Growth plan and finally choose between SIP and lump-sum investment. Based on your choice, set up your account and invest the amount you'd like to put in.

    4 Things to Consider Before Investing in Multi-cap Funds

    • 1. Check Past Historical Performance of 3 Years or More

      As you know, it was only in 2020 that SEBI made a clear distinction between a flexi-cap and multi-cap fund. Before this, a multi-cap fund would primarily function as a flexi-cap fund. But after the circular from SEBI on the introduction of the flexi-cap fund, the two were clearly divided in terms of their investment styles. Thus, when you check the past performance of the top multi-cap funds, pay special attention to their performance in the past three years, even if the fund is older than that. This is because it will help you understand how a fund performed as a pure multi-cap fund.

    • 2. Check Standard Deviation of the Fund

      Multi-cap funds are notorious for being more volatile than large-cap funds or even flexi-cap funds. This is because fund managers can take more defensive positions in these funds by shifting the majority of their asset allocation into large-cap equities in a bear phase. However, the minimum asset allocation of 50% into mid-cap and small-cap equities restricts the fund manager from doing this.

      Thus, checking the fund's volatility by looking at its standard deviation is important. It measures how much the fund has moved from its average expected returns based on its historical performance. Compare the funds based on their standard deviation and choose one that aligns with your risk profile.

    • 3. Know Your Financial Goals

      It's important to know your goals before investing. For instance, a multi-cap fund may not be the right choice if your goal is short-term. This is because short-term volatilities could temporarily depreciate your portfolio's value.

    • 4. AUM of the Fund

      Asset Under Management or AUM is another important consideration when investing in a multi-cap fund. This is because at least 50% of the fund is invested into riskier mid-cap and small-cap equity. Higher AUM allows the fund manager to ride through the short-term volatilities better.

    FAQ's

     

    Multi-cap funds invest at least 50% (25% each) into mid-cap and small-cap equities, while another 25% is invested into large-cap equities. This makes up a total equity exposure of 75%. The remaining 25% can be invested into debt, equity or any other asset class per the fund's investment objective. However, most multi-cap funds invest about 50% into large-cap while the rest equally into small-cap and mid-cap equities.

    Like most equity funds, an investment horizon of 5 years or more puts you in a better position to override short-term volatilities and optimize your return potential.

    Multi-cap funds can be slated as high-risk, although they are known to carry lesser risk compared to small-cap funds. This is because the investment of at least 25% each into mid-cap and small-cap equity helps to balance some of the risks.

    List of Funds in Multi Cap Fund

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