Multi-Cap Funds A Versatile Option For Investors

This article examines the performance and risk factors of multi-cap funds, emphasizing their risk-adjusted returns and their integration into your portfolio

Mutual fund investors in India have come a long way in the last few years. The consistent growth of mutual fund inflows since 2021, particularly through the systematic investment plan (SIP) route, is a testament to the maturity of the industry and the resilience of investors. Despite the equity market experiencing consolidation and offering limited returns in the past 18 months, there has hardly been any decline in the inflow numbers towards mutual funds. They have gained significant popularity among Indian investors thanks to a proactive regulator and stupendous efforts taken by the industry to educate the investors. The Securities Exchange Board of India (SEBI), in an effort to de-clutter the categories and make it true to the level, has clearly defined different categories for investment. One such equity category that has gained traction last year is multi-cap funds. These funds offer a diversified approach to investing by allocating assets across large-cap, mid-cap and small-cap stocks. By definition, erstwhile multi-cap funds were free to invest throughout the market capitalisation. The primary goal of this fund was to alternate between large-cap, mid-cap and small-cap exposures.

However, a 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. Given this scenario, 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 perception, however, was put to rest when SEBI approved a new mutual fund category called as flexi-cap in November 2020.