Multi-Cap Funds Make For An Appealing Choice

Are you planning to include a multi-cap fund in your portfolio but are concerned about its performance, investor participation, assets under management size, growth potential and the choices available? Rakesh Deshmukh takes a closer look at the world of multi-cap funds to uncover comprehensive details that will help you make a well-informed decision 

Multi-tasking is a term that you may have come across several times in today’s day and age. It refers to the ability of a person to manage more than one chore at a time. In the corporate world, we encounter the word multinational quite often, which implies that an organisation has operations in more than one country. In the world of investing, you may have observed that some investors employ a multi-strategy approach, combining one or more strategies in the market to minimise the risk and earn more returns. The same meaning applies to what we refer to as multi-cap funds. 

As the name suggests, a multi-cap fund invests in a diversified portfolio of equity and equity-related stocks across companies of varying market capitalisations including Large-Cap, Mid-Cap and Small-Cap. This type of fund allows investors to gain exposure across different market segments without requiring them to individually manage investments in each category. Multi-cap funds were introduced by the Securities and Exchange Board of India (SEBI) in October 2017 and provide a convenient and streamlined approach for investors. 

Instead of managing separate investments in largecap, mid-cap and small-cap categories, investors can now achieve diversified exposure through a single fund. Each fund allocates its investments differently, making the multi-cap fund category suitable for investors seeking to align with their risk tolerance. Unlike funds focused solely on large-cap, mid-cap or small-cap stocks where fund managers are constrained by specific portfolio definitions, multi-cap funds offer flexibility. This flexibility allows fund managers to capitalise on investment opportunities across the entire market spectrum. 

It is this versatility that makes multi-cap funds so popular among investors. As per SEBI, multi-cap funds are required to have a minimum 25 per cent allocation of their portfolio in large-cap, mid-cap and small-cap companies. Mutual funds have specific investment mandates: large-cap funds focus on the top 100 companies by market capitalisation, small-cap funds on those below 250. In contrast, multi-cap funds have the flexibility to invest across large-cap, mid-cap and small-cap stocks based on market conditions and investment opportunities perceived by the managers. 

During economic expansions, managers may increase exposure to mid-cap and small-cap stocks to capitalise on their potential for rapid growth. Conversely, during economic downturns, they may increase exposure to large-cap stocks for stability and resilience. 

According to the data presented in the table above, multi-cap funds have clearly outperformed across multiple time periods without exception. When comparing them with other categories, it becomes evident that multi-cap funds have outperformed large-cap funds in terms of returns over the specified time period, as shown in the data below. However, it should be noted that they were unable to beat the returns of mid-cap and small-cap funds. 

Multi-Cap Funds a Big Draw
Analysing the data available on the website of the Association of Mutual Funds in India (AMFI), it is observed that multi-cap funds have been attracting greater investor participation and consistently receiving significant inflows every month. On a year-over-year (YoY) basis, the inflows into multi-cap funds have shown a remarkable increase. In May 2024, they received an inflow of `2,644.88 crore compared to `104.55 crore in May 2023, representing a stunning growth of 2,430 per cent YoY. We have also compared these funds with other categories such as large-cap, mid-cap, small-cap and index funds. 

Interestingly, multi-cap funds have outpaced the growth in inflows on a YoY basis compared to large-cap, mid-cap and small-cap funds, but not index funds. During this period, large-cap, mid-cap and small-cap funds have seen growth rates of approximately 149 per cent, 118 per cent and -17 per cent, respectively. It is worth noting that multi-cap funds have maintained positive inflows consistently over the past 12 months, unlike large-cap, small-cap and index funds, which have experienced outflows for one month or more during the same period. Additionally, mid-cap funds have also shown stability with no outflows. 

When examining the AUM growth across categories, multi-cap funds have shown a remarkable 88 per cent increase, the highest among all the categories. In contrast, large-cap funds have recorded the lowest growth on a year-over-year basis, as indicated in the table below. However, it should be noted that the AUM size of multi-cap funds is relatively smaller compared to other categories according to the latest update. 

Reasons for Investing in Multi-Cap Funds
■ Diversification: Multi-cap funds spread investments across companies of various market sizes, offering diversification within a single fund.
■ Flexibility: These funds provide managers with the flexibility to adjust allocations between large-cap, mid-cap and small-cap stocks based on the prevailing market conditions.
■ Growth Potential: By investing across different market segments, multi-cap funds can seize growth opportunities across varying company sizes.
■ Risk Management: The diversified approach of multi-cap funds helps mitigate risks compared to concentrating solely on one market segment like large-cap stocks.
■ Long-Term Wealth Creation: Multi-cap funds are suitable for long-term investors aiming to build wealth over time while managing moderate levels of risk. n Active Management: Fund managers actively oversee multi-cap funds, aiming to pinpoint undervalued stocks and leverage market trends to boost returns. n Broad Market Participation: Investing in multi-cap funds enables participation across the equity market spectrum, from established large companies to emerging smaller ones. 

Difference between Multi-Cap and FlexiCap Funds 

If you think that multi-cap funds and flexi-cap funds are the same, let us explore and learn about the differences between them. 

Conclusion
In conclusion, multi-cap funds stand out in the mutual fund landscape for their ability to offer diversified exposure across large-cap, mid-cap and small-cap stocks within a single investment vehicle. This flexibility allows investors to benefit from varying market conditions and capitalise on growth opportunities across different segments of the economy. The data clearly indicates that multi-cap funds have consistently delivered robust returns, outperforming their benchmarks over multiple timeframes. 

Their popularity is underscored by significant inflows and a substantial increase in AUM year-over-year, reflecting growing investor confidence and interest. Investors looking to build long-term wealth while managing moderate risk find multi-cap funds appealing due to their balanced approach and active management strategies. Fund managers have the discretion to adapt portfolio allocations based on market dynamics, enhancing the potential for returns while mitigating risks through diversification. 

Furthermore, looking at their historical performance, multi-cap funds have consistently outperformed large-cap funds. Those investors who are willing to take slightly more risk than those involved in large-cap investments can consider multi-cap funds for the long term, say, 7-10 years. Not only do they offer good returns, they also provide diversification across categories such as large-cap, mid-cap and small-cap. So, if you are ready to invest, take into consideration multi-cap funds too.