What Is A Multi-Cap Fund? Pros And Cons And Who Should Invest?

A multi-cap mutual fund is a type of equity fund that invests in stocks across market capitalization
What Is A Multi-Cap Fund? Pros And Cons And Who Should Invest?

A multi-cap mutual fund is a type of equity fund that invest in stocks across market capitalisation. In a circular on September 11, 2020, the Securities and Exchange Board of India (Sebi) issued guidelines on what should be the minimum investment in each of the market segments.

The regulator prescribed that 75 per cent of a multi-cap mutual fund’s total investment should be in equities and equity-related instruments. This limit is further divided according to market cap.

It is recommended that fund houses should allocate a minimum of 25 per cent in each of the market segments—large-cap, mid-cap, and small-cap enterprises.

The idea is to protect investors’ interests in a volatile marketplace.

The multi-cap funds seek to minimise the market risks and ensure growth by diversifying their portfolio holdings to each segment. Hence, these funds could resort to quick portfolio adjustments to be proportional to an emerging situation.
Thus, multi-cap funds could be relatively less risky than capitalisation-weighted funds, such as large-cap, mid-cap, and small-cap. Multi-cap funds could be ideal for risk-averse or non-aggressive investors.

How Do Multi-Cap Funds Operate?

Depending on the type of fund, Sebi has outlined how each of them should allocate their resources in the respective segment they represent. For example, a large-cap fund can only invest in the top 100 companies based on market value. Likewise, small-cap funds can invest in firms ranked below 250.
Multi-cap funds, on the other hand, can invest in all three market cap segments. However, the proportion of stocks or the amount of exposure to a particular segment in a portfolio could vary, depending on the fund manager's discretion. 
For instance, mid-cap and small-cap stocks may be a priority when the economy is booming, and large-cap stocks may get higher weightage during a slowdown. 

What Are Pros And Cons?

Advantages: Multi-cap funds offer a diversified portfolio; hence, they could be relatively less risky. It is because the performance of an economic sector or industry could vary at a given time. 

Moreover, these funds provide exposure to all critical high-growth industries, irrespective of their market cap. Therefore, the chance of missing out on an opportunity would be less. 

These funds also provide the flexibility to change the portfolio composition between large, mid, and small-cap based on the situation.

Disadvantages: Multi-cap funds could be risky if they rely heavily on mid-cap and small-cap stocks to boost growth, as these segments are considered risky compared to large-caps. Also, a prolonged slowdown in the economy could adversely impact their growth.

Who Should Invest in Multi Caps?

Multi-cap mutual funds could be beneficial for first-time investors or those with a long-term horizon. 

Since first-time investors want to protect their seed money in the market, multi-cap funds offer a great start because of their relative stability. The fund's diversified portfolio distributes the risks proportionately. Investors with a long-term investment horizon could also benefit from these funds since they could easily absorb the short-term shocks and setbacks in the market over time. 

What to Consider Before Investing 

Goals: Before investing in multi-cap funds, you should be clear about your investment goals. It would help if you stayed invested for at least five years to make the most out of your investment.
Risk: Keep track of risks that may pop up from time to time during an economic cycle.
Expense Ratio: You should be clear about the expenses you would incur in the fund since it may eat into your returns. The fund houses levy an annual fee to cover the fund's administrative and operating expenses.

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