Mutual fund investors are usually spoilt for a choice when it comes to opting for one mutual fund over others. According to the latest AMFI (Association of Mutual Funds in India) data, there are a total of 1,309 schemes across dozens of categories which include but are not limited to ELSS funds, dividend yield funds, focussed funds, small cap, large cap and multi cap funds.
In this piece, we will focus primarily on multi cap funds. At the outset, we will define what are multi-cap funds.
What are multi cap funds?
These are diversified equity funds that invest in the stocks across market capitalisations. Investments are made in different proportions in order to meet the fund’s investment objective.
According to the capital markets regulator Securities Exchange Board of India (SEBI), these funds are meant to hold a minimum of 25 percent funds in small, mid and large-cap stocks. With a minimum of 50 percent funds locked in mid and small-cap stocks, these funds are prone to higher volatility than large cap funds when markets play spooky.
Why should you invest in them?
According to the Morning Star data, multi cap funds — as a category — have given a better performance than flexi-cap funds by delivering 7.59 percent return in the past year as compared to 3.18 percent return by the latter.
In these funds, large cap funds give stability, while the other two categories of market capitalisation spectrum provide the scope of higher returns, particularly during the bull market.
There are 14 multi cap funds, lower than flexi caps (which are 33 in number). After the recent inflow of ₹392.66 crore in the month of August, net assets under management (AUM) in this category stood at ₹62,108 crore as on Aug 31, 2022.
It is vital to note that multi cap funds are different from flexi cap funds (a category created in Nov 2020) in a way that they do not have any restriction of investing a minimum threshold in one category of funds i.e., small or mid-caps. The only restriction is to invest a minimum of 65 percent of funds in the equity.
On the other hand, multi caps must allocate one-fourth funds in each of the three categories of capitalisation spectrum (small, mid and large cap).
After weighing the pros and cons of mutual funds – financial experts opine that multi cap funds tend to offer better returns than their counterparts in other segments.
Daylynn Pinto, senior fund manager, equity, IDFC Asset Management Company believes that multi-cap funds can be all-weather funds as the diversity of market cap allocations helps the fund throughout various market cap cycles.
It is vital to understand that there is no rule of thumb that says that one category of funds would outperform the other category, but during different periods of time, one category may outpace the other one. And this trend could even reverse after a while, or sometimes remain constant year after year.