Are multi cap funds better than large cap funds for retail investors?

For small investors, it is vital to know which segment of funds bear higher returns before they choose them over others. Some tend to believe that it is the small cap funds which have a potential to make hay in the market, while others believe that mid-caps are better, and those who root for large cap stocks vouch for their safety and reliability.

However, after looking at the pros and cons of mutual funds across market capitalisation – some analysts assert that multi cap funds rank higher than their counterparts in other categories. Multi-cap funds are diversified equity funds which invest in stocks of companies with different market capitalisations. The investments are made in varying proportions to meet the investment objective of the fund.

According to markets regulator SEBI, multi-cap funds are meant to hold 25 percent each in mid, small and large-cap stocks. Since these funds hold a minimum of 50 percent in mid and small-cap stocks, they may suffer higher volatility during market corrections.

Multi-cap fund category has been among the best-performing equity categories in the one-year period, Data from Value Research shows. The category has given 40.86 percent returns on an average. Only small-cap, information technology (IT) and infrastructure sector funds have done better.

Even multi cap funds’ NFO (new fund offer) garnered overwhelming response. For instance, Axis MF’s multi-cap fund garnered ₹4,779 crore, whereas HDFC MF’s multi cap schemes fetched ₹4,000 crore in Nov-Dec 2021.

See the direct returns of Multi Cap Funds as on 3 Jan, 2022:

Although there is no rule of thumb that one category of funds would outperform the other category, but during different periods of time, one category tends to outpace the other. The trend could reverse after some time, or even stay constant year after year.