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?
- Large cap: According to SEBI, the largest 100 companies by market capitalization are classified as large cap companies.
- Midcap: SEBI categorizes 101st to 250th companies by market capitalization as midcap companies. There are 150 midcap stocks.
- 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
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.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.