Investing In Multi-Cap Funds

Diversification is the key to success in equity markets and multi-cap funds serve the diversification needs better than flexi-cap funds. In this article, Henil Shah shares insights on multi-cap funds and also compares them with flexi-cap funds and large & mid-cap funds

- Henil Shah

We have watched the mutual fund industry evolution in a variety of ways, whether in terms of products or rules. In October 2017, the Securities and Exchange Board of India (SEBI) issued a circular requiring mutual fund companies to have a standardized category with established requirements. This was a very welcome step by SEBI since it allowed investors to accurately identify the category and make a decision based on the characteristics of distinct categories. It also ordered the asset management companies (AMC) to have no more than one fund in each category. This also helped to reduce unneeded misunderstanding among investors.

The main goal of SEBI's mutual fund rationalization is to provide some standards in mutual funds and make mutual funds true to their label. However, SEBI discovered that there was one such group in equity mutual funds that did not live up to its name. This category included multi-cap funds. By definition, erstwhile multi-cap funds were free to invest throughout the market capitalization. The primary goal of this fund was to alternate between large-cap, mid-cap and small-cap exposures. However, the majority of the funds focused solely on large-cap stocks and had relatively minimal allocations to mid-cap and small-cap stocks over market cycles.

In light of this, SEBI issued a circular in September 2020 requiring multi-cap funds to invest at least 25 per cent each in large-cap, mid-cap and small-cap stocks. This caused turmoil in the financial markets since investors expected a significant sell-off in large-cap companies along with increased purchasing in mid-cap and small-cap firms. This concept, however, was put to rest when SEBI approved a new mutual fund category called as flexi-cap in November 2020. Flexi-cap funds are free to invest throughout the market capitalization spectrum.