In Which Companies Do Muti-Cap Funds Invest?

According to a recent data report by the Association of Mutual Funds in India (AMFI), multi cap funds received total inflows of Rs 10,500 crores in December 2021. This was almost triple the net inflows received in Oct 2021 and Nov 2021 which stood at Rs 3384 crores and Rs 3472 crores respectively. Clearly, more and more investors are turning towards multi cap fund schemes. In this article, we will understand what multi cap funds are, their benefits, and the companies they invest in.

What are multi cap funds?
Multi cap funds, also known as diversified equity funds, are a type of equity fund that invest their assets in stocks of companies across market capitalization and sectors, irrespective of size and market. These mutual fund schemes offer investors the benefit of diversification by investing across stocks of different companies. Investments in multicap funds are done in varying proportions to meet the fund’s investment objectives.

Benefits of multi cap funds
Following are some of the benefits of multi cap funds that an investor may enjoy:
1. Diversification across market cap – As multicap funds invest in the stocks of small-cap, mid-cap, and large-cap companies, they help investors diversify their portfolios across a wide variety of industries and sectors.
2. Flexibility to switch holdings within the fund – Fund managers of multicap funds have the flexibility to switch holdings in the fund between small-cap, mid-cap, and large-cap stocks as they deem fit basis their market outlook. For instance, if small-cap and mid-cap stocks become overvalued, the fund manager of multi-cap funds may move holdings to large-cap stocks and vice versa.

3. Exposure to key sectors – As multicap funds do not restrict their allocation to a particular sector or market capitalization, an investor enjoys exposure to key sectors and market cap through this fund. This may help investors to tap into an investment opportunity as and when available in the markets.

Who should invest in multi-cap funds?

Investors seeking exposure across the market and not restricting themselves to a particular sector may opt for multi cap mutual fund scheme. These schemes may also be suitable for investors with a very high risk profile who are looking to create wealth in the long run. It may also be ideal for those investors who wish to balance volatility and risk in a single portfolio. It may also be suitable for those individuals who do not wish to get into the nuances of determining which market capitalization would suit them or choosing different stocks for their portfolios. Individuals looking forward to staggering their investments through systematic transfer plans (STP) may also consider investing in multicap mutual fund schemes. Nevertheless, before investing in multi-cap funds, investors must be considerate of several parameters such as their risk profile, investment duration, financial goals, etc., and choose a scheme that suits their investment needs.

In which companies do multi-cap funds invest?

Multi-cap mutual fund schemes offer investors flexibility with respect to allocation in small-cap, mid-cap, and large-cap stocks. However, it has recently been discovered that several multi-cap mutual funds have skewed their investment portfolios with more than 80% of investments in stocks of large-cap companies. On the other hand, some multi-cap funds have a trivial allocation to stocks of small-cap companies. Considering these parameters, a strong urge was felt to reassess the characteristics of multi cap schemes and take essential steps to distinguish these mutual fund schemes from other types of mutual fund schemes. Therefore SEBI (Securities and Exchange Board of India) - the regulatory body for commodities and securities market in India, issued a circular dated 11th September 2020, highlighting the guidelines for regularization and categorization of mutual funds in India, which covered asset allocation rules for multi cap mutual fund schemes as well. This helped in diversifying the underlying investments of multi cap schemes across stocks of small-cap, mid-cap, and large cap companies and also achieving the objectives of true to label and appropriate benchmark. As per the circular, multi cap mutual funds are instructed to invest a minimum of 75% of their assets in equities and equity-related instruments in the following manner:
• At least 25% of net assets should be allocated to stocks of equity and equity-related instruments of small-cap companies
• At least 25% of net assets should be allocated to stocks of equity and equity-related instruments of mid-cap companies
• At least 25% of net assets should be allocated to stocks of equity and equity-related instruments of large-cap companies
• The fund manager of multicap schemes has the flexibility to allocate the remaining 25% of total assets across market capitalization basis their market outlook.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.