Multi Cap Funds

Multi-cap mutual funds are mandated by the Securities and Exchange Board of India (SEBI) to invest at least 25% in each of large-cap, mid-cap and small-cap companies. The last 25% can be invested in equity (any market cap/sector) or even debt instruments based on the fund's objective.

As per SEBI regulations, the following are the definitions of large, mid and small cap companies:

• Large-cap companies are the top 100 companies in terms of market capitalisation and offer stability to the portfolio. 
• Mid-caps companies rank between 101 and 250 in terms of market capitalisation.
• Small-caps companies rank beyond 250 in terms of market capitalization.

Both mid and small-caps have high growth potential, thus making multi-cap funds well-diversified funds.

Balanced equity portfolio at all times

Since multi-cap funds invest a minimum of 25% in each market capitalisation, they enjoy a mix of:

• Stability from large caps
• High growth potential from mid-caps
• Potential multibagger returns from small-caps

The table below summarizes the returns from large, mid, small and multi-cap indices of Nifty.

Source: NSE

As you can see, the multi-cap index has given higher returns than the large caps but slightly lower returns than the mid and small-cap indices. With lower risk than pure mid or small caps, you can earn high returns through multi caps.

Diversification

Multi-cap funds invest in companies across different market capitalisations. Each category of market capitalisation has a unique set of benefits.

• Large caps are proven leaders, and they deliver consistent growth, have strong balance sheets, and are run by good management.
• Mid caps are emerging giants with strong businesses, good earnings growth, and have profitable products and services. 
• Small caps are rising champions that aim to deliver exponential earnings growth and benefit from economic growth due to their cyclic nature.

By investing in companies across market capitalisations, multi-cap funds capture the different opportunities of each of them. Moreover, they invest in companies without any style or sector bias, making them well diversified. 

Good long-term investment

Investing in multi-cap funds can help in creating long-term wealth. This is because they primarily invest in equity and related instruments, which have a high growth potential in the long term. Take a look at the returns of the Nifty 500 Multicap 50:25:25 index in the last three, five, seven and ten years.

Source: NSE

An investment of Rs 1 lakh made 10 years ago in a multi-cap fund would be at least Rs 4.26 lakhs today. If an SIP of Rs 5,000 were started ten years back in a multi-cap fund, the total investment today would be Rs 6 lakhs, and the current value would be Rs 14.45 lakhs. This shows long-term investing in multi-cap funds will help accumulate wealth through the power of compounding.

Restricted asset allocation

One of the worst market crashes was witnessed in 2020, right before the lockdown. In just thirty days, the Nifty 50 crashed by 34% due to the pandemic and uncertainty. 

The Nifty 500 Multicap 50:25:25 index, on the other hand, crashed by 39% during the same period. This shows that during bear market phases and market crashes, the multi-cap category can take a hit.

Source: NSE

Despite anticipating a market correction, the fund managers of multicap funds are obliged by SEBI regulations to invest in large, mid and small cap companies.

To invest or not invest in multi-cap mutual funds will depend on your goals and risk tolerance level. Since multi-cap funds invest majorly in equity, they can be very risky. Hence, you should consider investing in them only if you want to:

Simplify portfolio

Multi-cap funds are an example of the best of both worlds, as they offer stability from large-cap companies and growth potential from mid and small-cap companies. If you are looking for an optimal balance in your portfolio, then multi-cap funds are your go-to funds.

Build long-term wealth

Multi-cap funds help build wealth in the long term and best suit long-term goals such as retirement or a child's education. Since they offer higher returns than pure large-cap funds and also have mid and small-cap exposure, adding them to your portfolio can help in accumulating a huge corpus.

Note: The above information is for educational purposes only. It is best to consult a financial advisor before making investment decisions.