Multicap mutual funds are diversified equity mutual fund schemes which invest across market cap segments i.e. large cap, midcap and small caps. Multicap funds are among the most diversified among all equity funds because they are not only diversified across industry sectors, but also across market cap segments.

Prior to September 2020, multicap mutual funds had the flexibility to invest across market cap segments without any limits for any specific segment. However, as per SEBI’s circular in September 2020, multicap funds must invest at least 25% of their assets in large cap stocks, at least 25% in midcap stocks and at least 25% in small cap stocks.

What are different market cap segments?

1. Large cap: According to SEBI, the largest 100 companies by market capitalization are classified as large cap companies.


2. Midcap: SEBI categorizes 101st to 250th companies by market capitalization as midcap companies. There are 150 midcap stocks.


3. Small cap: 251st and smaller companies by market capitalization are classified as small cap companies by SEBI.

Multicap funds have the advantage of providing diversification benefits across all the three market segments.

Benefits of Multicap Funds

• Different segments of the market outperform each other in different market cycles. For example large cap stocks usually outperform midcap and small cap stocks in bear market conditions. Midcap and small cap stocks have the potential to outperform large cap stocks in bull markets.


• Multicap funds provide exposure to a larger number of industry sectors compared to large cap funds. There are several sectors where large caps do not have any presence. Some of these sectors may have high growth potential in domestic consumption driven economy like India. Investors can have exposures to these sectors through multicap funds, while the large cap allocations (minimum 25%) of these funds provide some stability in volatile market conditions compared to midcap and small cap funds.


• Multicap funds have 50 – 75% of their portfolio invested in midcap and small cap stocks. Midcap and small cap stocks have the potential and tend to outperform large cap funds in the long term (see the table below).

Source: National Stock Exchange, Advisorkhoj Research. *Trailing Compound Annual Growth Rate (CAGR) returns as on 30th September 2021. Disclaimer: Past performance may or may not be sustained in the future.

• Multicap mutual funds provide exposure to a much larger universe of stocks compared to large cap or even midcap funds. While the large cap segment is restricted to 100 stocks, the mid cap (150 stocks) and small cap segment (250+ stocks) covers at least 500 stocks. Therefore, multicap fund managers have more investment opportunities compared to large cap and midcap fund managers.


• Multicap mutual funds have the potential to create higher alphas compared to large cap funds. Large cap stocks usually have high percentage of institutional ownership and as a result, are more researched than small cap and midcap stocks. Price discovery is more efficient (faster) in large cap stocks with relatively less scope for fund managers to discover stocks that are undervalued. Multicap fund managers may be able to identify midcap and small cap stocks that are trading at deep discounts to their intrinsic long term valuation and create alphas for investors over sufficiently long investment horizon.


• Multicap mutual fund managers have the flexibility to increase or decrease allocations to different market cap segments according to market conditions, subject to SEBI mandated minimum allocation limits for different market segments for these funds. Accordingly, multicap fund managers can take advantage of market opportunities or limit risk depending on market situation for the benefit of investors. However, it must be stated here that flexicap funds, which do not have any market cap restrictions have greater flexibility compared to multicap funds.

What is the difference between Multicap and Flexicap Funds?

• Flexicap funds can invest in any segment; there is no minimum or maximum limit with respect to any market cap segment at the discretion of the fund manager.


• Multicap funds, on the other hand, must invest at least 25% in each of the three market cap segments e.g. large cap, midcap and small cap.


• Multicap funds will have minimum 50% exposure to midcap and small cap stocks across all market conditions. Midcap and small cap stocks have the potential of giving superior returns in the long term compared to large caps, but may see greater drawdowns in volatile markets. Investors should have high risk appetite for multicap schemes.


• Flexicap funds may have lower exposure to small and midcaps depending on market conditions and the outlook of the fund manager.


• Flexicap funds may resemble large cap funds depending on the fund manager’s market outlook and investment strategy. Multicap funds are true to label in terms of providing exposure to different market cap segments.

Who should invest in Multicap Funds?

• Investors looking for capital appreciation over long investment horizons may invest in multicap funds.


• Investors who do not have experience of investing in midcap and small caps, can get exposure to these segments by investing in multicap funds, while the large cap allocation of multicap funds limits the downside volatility of midcap and small caps.


• Investors with long investment horizons. Financial advisors recommend minimum 5 year investment tenures for multicap funds.


• Investors should have high to very risk appetite for multicap funds.


• Multicap mutual funds are suitable for Systematic Investment Plan (SIP), since these schemes are more volatile than large cap schemes. Investors can take advantage of volatility through Rupee Cost Averaging by SIPs.

You should always invest according to your risk appetite and investment needs. You should clearly understand the risk profile of a scheme before investing and consult with your financial advisor if you need any help in understanding your risk appetite and the risk profile of your mutual fund scheme.

Article Source: Advisorkhoj.com

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