What is Multi-Cap Mutual Funds and its Types

26 July, 2024

Synopsis

Multi cap mutual funds invest across market capitalisations, with a minimum of 25% each in large, mid, and small cap stocks, per SEBI regulations.
These funds offer diversification, flexibility in allocation, and potential for consistent performance across market cycles and suit those with moderate risk tolerance.
Multi cap funds can be large cap oriented or mid/small cap oriented or can have a flexi/balanced allocation approach. Investors can choose a multi cap fund category that matches their risk appetite and investment objectives.

Keen to start a Mutual Fund investment journey but unable to decide between small, mid, and large cap funds? Well, there is a category that helps you find a middle way? Welcome to the world of multi-cap mutual funds!

Let us understand how multi cap mutual funds can help you make better investment decisions based on your investment and financial objectives.

What are Multi Cap Mutual Funds?

Multi cap mutual funds are a unique category of equity funds that traverse market capitalisations without favouring any specific capitalisation. According to SEBI regulations, in a multi cap fund, a minimum of 25% must be invested in large, mid cap, and small cap stocks each. The remaining 25% can be allocated based on the fund manager's perspective, allowing them to go overweight or underweight on any market cap.

This distinctive structure allows fund managers to tap into growth opportunities across market caps. For instance, if mid and small caps stocks appear overvalued, the fund manager can allocate a larger portion to large caps stocks and vice versa.

How Do Multi Cap Funds Work?

Multi cap funds operate by strategically investing in a mix of large, mid, and small cap stocks in varying proportions. The process involves several key steps:

Stock List: The fund manager screens all listed stocks based on market cap, liquidity, management quality and other parameters.
Research and Analysis: Thorough research and analysis of shortlisted stocks identify those with competitive advantages, future growth drivers and reasonable valuations.
Rebalancing: The portfolio undergoes periodic rebalancing to reflect updated outlooks and maintain target market cap allocations. Profit booking, stop-losses, and churn also contribute to the rebalancing process.

Types of Multi Cap Mutual Funds

While adhering to the minimum 25% rule for each market cap, multi cap funds exhibit different strategies based on the remaining allocation. Broadly, they fall into three categories:

Large Cap Oriented

These funds tilt most of the flexible 25% allocation towards large-cap stocks. Large cap exposure can go up to 50% in such funds.

Mid/Small Cap Oriented

These multi cap funds allocate the additional 25% mostly to mid and small caps. Total mid/small exposure can go up to 50% in some cases.

Flexi/Balanced Allocation

As the name suggests, these funds take a balanced approach to the 25% flexible allocation between large, mid, and small caps. Total exposure to each segment is usually in the 30-40% range in such funds.

Who Should Invest in Multi Cap Mutual Funds?

Multi cap mutual funds suit many investors seeking an adaptable and all-weather equity fund. Their balanced exposure caters to the preferences of moderate risk-takers who prioritise stability and growth.

How do you invest in multi cap mutual funds?

Investing in the best multi cap mutual funds is a straightforward process through online platforms like the HDFC Bank SmartWealth App:

Research and Shortlist: Evaluate and shortlist 2-3 suitable multi cap funds based on AUM, performance, financial targets and fund manager reputation.
Fund Investment: Search for the fund, select the desired amount, complete KYC if you are a new investor and invest lumpsum or start an SIP as per choice.
Track Performance: Add the multi cap fund to your portfolio and periodically track its performance. Rebalance if needed.

Starting and managing multi cap fund investments with SmartWealth is quick, low-cost, and transparent, providing a convenient avenue for building long-term wealth.

Advantages and Disadvantages of Multi-Cap Mutual Funds

Pros of Multi Cap Mutual Funds	Cons of Multi Cap Mutual Funds
Diversification across Market Caps: Multi cap funds spread investments across large, mid, and small caps, reducing concentration risk.	Equity Market Volatility: Susceptibility to market fluctuations and downturns due to the predominant equity allocation.
Built-in Flexibility for Allocations: Fund managers can dynamically shift investments based on market conditions, optimising returns.	Higher Risk in Small/Mid Caps: Funds tilted towards mid/small caps may carry a higher risk than large cap focused funds.
Consistent Performance Across Cycles: Multi cap funds offer more stable performance over market cycles than funds focusing on stocks of one specific capitalisation.	Fund Manager Allocation Risk: Incorrect market cap allocation calls or stock picks may negatively impact fund performance.
Ideal for Long Term Wealth Creation: The blend of stability and growth makes multi cap funds suitable for investors focused on wealth creation.	Limited Large Cap Cushion: Funds with lower large cap exposure may have a reduced ability to absorb market downturns.
Simplified Selection with One Fund: With just one multi cap fund, investors can access diversified exposure to the entire market spectrum.	Impact of Regulatory Changes: Any alterations in SEBI's market cap definition or allocation rules can affect the fund's strategy and performance.

Multi cap mutual funds present a compelling option for investors seeking a balanced and adaptable approach to equity investments. Understanding the nuances, benefits, and risks enables investors to make informed decisions aligned with their financial targets and risk tolerance.

Start your investment journey by downloading the HDFC Bank SmartWealth App from Playstore/Appstore. Based on your risk and financial objectives, you can select and invest in pocket-friendly options from the top-rated multi cap mutual funds.

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What are Multi-Cap Mutual Funds?