Multi Cap Mutual Funds

Confused about whether to opt for large-cap funds for their stability or go for mid-cap and small-cap mutual fund schemes to gain from sharp capital appreciation? Investors who don’t want to restrict themselves and seek to reap the benefits of investing in large, mid, and small-cap companies can consider a fund category known as multi-cap mutual funds. Let’s explore in detail what multi-cap funds are, the best multi-cap funds, and how you can choose one for yourself. 

What are Multi Cap Funds?

As the name suggests, multi-cap mutual funds invest in companies across market capitalization. Unlike large-cap funds, which invest in only the top 100 companies by market cap, or small-cap funds which invest in stocks ranked 251st and beyond on the stock exchange, multi-cap mutual funds can invest in all three categories of companies: large-caps, mid-caps, and small-caps. 

As per the guidelines issued by the Securities and Exchange Board of India (SEBI), Multi-cap mutual funds are required to hold at least 75% of their investments in equity and equity-related instruments. They must allocate at least 25% of assets to large-cap stocks, 25% to mid-cap stocks, and another 25% to small-cap stocks. The fund manager can invest the remaining 25% based on the type of funds and as per his/her preference. 

Best Multi Cap Mutual Funds

List of the top-performing multi cap mutual funds sorted by returns with their AUM and Expense Ratio.

How do Multi Cap Mutual Funds work?

When you invest in a multi-cap mutual fund, you buy units on that day’s NAV. For example, if you invest ₹5000 and the NAV on that day is ₹10. You will be allotted 500 units of that multi-cap fund. The fund manager pools your money along with other investors and allots units accordingly.

With the ‘mutual fund’ now collected, the fund manager deploys 25% in large-cap, 25% in mid-cap, and 25% in small-cap as mandated by SEBI. The fund manager now selects stocks by carefully analysing different companies. When investment in any market cap grows out of proportion, the fund manager rebalances to meet the level mandated by SEBI.

How do Multi Cap Funds perform?

Multi-cap funds are usually benchmarked against the NIFTY 500 Index. Funds in this category have returned an average of 15.94% in the last three years, 18.59% in five years, and 12.16% in ten years.

Who should invest in Multi-cap Funds?

Investors have different personalities and traits, what’s suitable for one may not be the ideal approach for another. Here are the types of investors who should invest in multi-cap mutual funds:

Needs Balanced Portfolio

Multi-cap funds take a balanced approach to risks and rewards since they invest in companies from all three market capitalizations. This means they are not as risky as a small-cap fund, which is highly concentrated on small-cap companies. Multi-cap funds include a mix of stable growth companies and high-risk, high-reward companies.

Seeking Diversification

Investors who prefer a diversified portfolio can invest in multi-cap funds. This fund includes stocks from large-cap, small-cap, and mid-cap companies. Moreover, these funds are dynamic in nature, meaning that apart from the mandated SEBI allocation (25-25-25), they can choose to adjust their portfolio on the basis of market conditions.

First-time Investors

People who are new to investing and are not clear whether they should invest in small-cap, large-cap or mid-cap mutual funds can opt for a multi-cap mutual fund. Given its diversification, this fund offers investors a balanced approach. 

What are the factors to consider before investing in a Multi-cap fund?

There are multiple funds within multi-cap funds. If the objective of all funds is the same, how do you decide the one that’s best for you? Deciding which fund to invest in is crucial and can be done in two phases. One is getting clear on the basics, and the second is analysing the financials of a fund. Here are the factors you should consider before investing in a multi-cap fund:

Investment Horizon: 

One important factor you should consider before investing in a multi-cap fund is your investment horizon. To make the most of your investment in a multi-cap fund, you should have a time horizon of at least 5-7 years. Anything less than this timeline, may not yield the best results.

Investment Risk: 

Multi-cap funds are unsuitable for investors with a low-risk appetite as they invest 75% of their asset in equity. This can make a multi-cap fund volatile in the short term. Investors should evaluate their existing mutual fund investments and current exposure to the market cap segments before adding a multi-cap fund to their portfolio so that it aligns with their risk profile.

Expense Ratio: 

Expense ratio is a critical factor that can impact the performance of a mutual fund. It is a fee charged by the mutual fund house for their managing the fund. A higher expense ratio means a larger portion of the fund's returns will be eaten up by these fees, potentially reducing the overall returns for investors. 

Once you are clear on the above, you also need to compare key financial metrics of different funds. This includes the Alpha, Beta, Standard Deviation, XIRR, etc. We’ve covered how to check and pick an equity mutual fund in depth here.

What are the risks of investing in Multi Cap Funds?

With good also comes bad, there are certain risks of investing in multi-cap mutual funds, like:

Volatility Risk: Multi-cap funds invest in large, mid, and small-cap companies, which means they are exposed to market volatility. During market downturns, small and mid-cap companies will experience more volatility than large-cap companies, which can impact the funds' performance.

Allocation Risk: Unlike flexi-cap funds, multi-cap funds do not enjoy the flexibility to modify their allocation across categories. Since the fund has a fixed allocation on all three market capitalizations, during a market cycle where one sector is less favourable, it can be more impacted than the other. 

Fund Manager Risk: Multi-cap funds are actively managed funds, which means their performance highly depends on the judgement and analysis of the fund manager. Poor stock picking can lead to underperformance. 

Liquidity Risk: Small-cap stocks form 25% of a multi-cap fund's portfolio. Given their nature, these stocks may face liquidity challenges. This means that exiting this fund may be challenging due to the liquidity restriction.

Difference between Multi Cap & Flexi Cap Mutual Funds

Multi-cap funds and flexi-cap funds both offer diversified equity exposure, but they operate in different ways. While multi-cap funds have a fixed allocation of 25% each to large-cap, mid-cap, and small-cap stocks, providing a balanced approach. 

Flexi-cap funds are more flexible in their allocation. The fund manager has the freedom to decide how much to invest in each category, adjusting the portfolio according to market conditions and opportunities. 

This flexibility allows flexi-cap funds to be more responsive to market trends, while multi-cap funds follow a defined strategy that ensures exposure across all market segments.

Taxation Rules of Multi Cap Mutual Funds

Returns from multi-cap funds are subject to a capital gains tax. Capital gains tax applies to the gains made from selling your mutual fund units. The quantum of tax on gains depends upon the holding period.

Short-term Capital Gains Tax

If you sell your mutual fund units in less than 12 months, then gains made on them are short-term capital gains. They are taxed at a flat rate of 20%. 

Long-term Capital Gains Tax

If you sell your mutual fund units after 12 months, then gains made on your investment are long-term capital gains. Gains up to ₹1.25 lakhs are exempt from any taxes. For any gains above that, a tax rate of 12.5% applies.