Why Your Portfolio Needs Multi-Cap Funds Multi-cap funds invest a minimum of 25 percent in each of the categories of funds across market capitalization i.e., small cap, large cap and mid cap.

Multi-cap funds seem to be the flavour of the season. After Tata MF, Edelweiss MF and Mirae Asset MF coming up with them last year, DSP MF launched a multi-cap fund in 2024. In 2020, the market regulator changed the mandate of multi-cap funds. Since then 19 multi-cap mutual funds have come into existence with total assets under management (AUMs) of INR 78,415 crore, as on June 30, 2023, according to AMFI (Association of Mutual Funds in India) data. A year ago, the number stood at 14 with total assets under management (AUM) of INR 53,297 crore, as on June 30, 2022.

WHAT ARE MULTI-CAP FUNDS?

Multi cap funds are mutual funds that invest a minimum of 25 percent in each of the categories of funds across market capitalization i.e., small cap, large cap and mid cap. In other words, these schemes are mandated to invest a minimum of 75 percent of funds in a pre-defined ratio, leaving the leeway of remaining 25 percent only.

SEVERAL BENEFITS:

Diversification: Your portfolio gets diversified without much effort. Multi-cap funds invest in large- cap, mid-cap, and small-cap stocks, due to which investors get exposure to companies of different sizes. "In the current market conditions, we observe that valuations favor large-cap companies, whereas mid and small-cap companies exhibit stronger earnings momentum. Therefore, it is advisable to maintain a well-diversified "multi-cap" portfolio that includes stocks from large, mid, and small-cap segments as it presents are potent combination of valuation comfort and earnings growth, essential for navigating through current volatile markets," says Trideep Bhattacharya, CIO, Equities, Edelweiss MF. The fund house raised more than INR 1,000 crore in its multicap NFO last year.

No need to re-balance as per economic cycle: Since the fund remains invested in largecap, mid-cap and small-cap companies across all market cycles, investors need not worry about re-balancing as per market cycles. Over the long-term, the remaining invested in different types of companies can help generate superior returns.

Managing risk: Investing in only small-cap and mid-cap stocks can be riskier. However, in multi-cap Funds, the fund manager also allocates funds towards large-cap stocks, which helps in managing the risk of the portfolio better. "While midcap and small-cap funds can potentially offer higher returns, they come with increased volatility, which might not be suitable for investors looking for a smoother journey. Also, when the valuations of midcap and small-cap stocks, in general, are high, multi-cap funds provide a balanced option to invest for long-term growth," says Devender Singhal, EVP & Fund Manager, Kotak Mutual Fund.

RIGHT ALLOCATION & INVESTMENT

According to industry experts, the allocation to multi-cap funds should be considered as a strategic and perennial component of one's portfolio. According to Singhal, multicap funds offer you all the flavour of the market, say large, mid and small-cap bundled into one. "It also has an automatic way of booking profits in one market cap if it crosses a predetermined level. It also adds to the weight of a particular market cap, if the allocation falls below a certain level. This feature of multicap funds together with the fact of it being a diversified fund allows it to be a core part of every investor's portfolio. For investors wanting to have only one equity fund in their portfolio, multi-cap funds may be the go-to option."

Should you invest?

However, before going in for such funds, it is important to take some factors into account.

Risk appetite: You need to consider the risk taken by the fund manager and match the same with your risk appetite. Within each category, the approach of each fund manager could be different. For example, within mid-cap stocks, a fund manager could select safe stocks versus riskier stocks (like commodities). This will be reflected in risk measures of the fund.

"We often say that choosing a multi-cap fund is like picking a show on Netflix. You need to check the reviews (historical performance), see if the cast/crew (Fund manager) has a good track record, and make sure it suits your watching style (risk tolerance). And remember, past seasons (performance) aren't always a guarantee for the next blockbuster," says Singhal.

Investment goals: Another important factor to look into is your own investment goals. You need to understand and decide what you want from the investment you are going to make. "We advocate that the distribution of investments should ideally be tailored to align with the investors' risk tolerance and return goals, making it most effectively determined by an qualified financial advisor," shares Bhattacharya.

ARE MULTI-CAP BETTER THAN FLEXI CAP FUNDS?

While flexicap funds and multi-cap funds both fall under the diversified equity funds category, the main point which segregates them is their flexibility in allocating assets across market capitalizations. Flexicap funds can invest across market caps without any predetermined allocation, adjusting based on market conditions. So the key difference is in the relative exposure. "The advantage of multi-cap funds lies in their defined allocation, potentially offering a smoother ride for those who prefer a set-itand- forget-it mentality," adds Singhal.