How multi cap mutual funds work

Multi cap mutual funds were once the most sought-after mutual fund schemes.

So much so that it would be almost unimaginable to have a mutual fund portfolio without a multicap fund in it.

Multi cap mutual funds would also be recommend to first time equity investors.

This is all in the past now, with new rules for multi cap mutual funds brought about by SEBI effectively 2021 they now require a fresh approach and perspective since the old rules no longer apply.

What is a multi cap mutual fund?

A multi cap mutual fund needs to invest in the following manner now:

Minimum 25% investment into equity and equity related instruments of large cap companies (as opposed to no such restriction earlier).
Minimum 25% investment into equity and equity related instruments of mid cap companies (as opposed to no such restriction earlier).
Minimum 25% investment into equity and equity related instruments of small cap companies (as opposed to no such restriction earlier).

A multi cap mutual fund would now require a minimum of 75% investment in equity as opposed to 65% earlier.

Additional reading: Click Here to read more about how mutual funds are taxed

What is a flexi cap mutual fund?

A flexi cap mutual fund needs a minimum of 65% investment in equities at all times.

There is no restriction with regards to caps or sectors.

There is no restriction with regards the remaining 35% as well.

The fund manager can invest the remaining 35% as per her wish in any of the following:

Domestic Equity
International Equity
Cash
Debt

What is imperative is that 65% at all times is invested in equities to qualify as a flexi cap fund.

Basically, a flexi cap fund is exactly what a multi cap fund used to be earlier before the new rules set in, the only change is in the name.

Multi cap mutual funds list

List of Multicap funds as on 1^st March 2021

Baroda Multicap

BNP Paribas Multicap

ICICI Pru Multicap

Invesco Multicap

ITI Multicap

Mahindra Manulife Multicap

Nippon Multicap

Principal Multicap

Quant Active Multicap

Sundaram Equity Multicap

Ever since the new SEBI rules have come into effect from February 2021, the number of multi cap funds in the industry has automatically come down.

It is usually seen that investors look at past performance before deciding whether to invest or not in a particular mutual fund scheme.

Additional reading: Click Here to read more about why you should not invest based on past returns

No matter how flawed this methodology is, there is no denying the suitors it has.

Fortunately or unfortunately, however you look at it, the same methodology cannot be applied here since there is no history to compare and analyse.

What can be done though is understanding how funds in this category have functioned in the past, without paying attention to their past returns.

For example, the following three funds:

Invesco Multicap
ITI Multicap
Quant Active Multicap

have more or less always been functioning as how the new redefined multi cap funds are expected to.

So therefore, these funds would not need to change much as far as their functioning is concerned.

Another interesting point to note is that only three funds have an AUM of more than 1,000 cr which are:

ICICI Multi cap
Invesco Multi cap
Nippon Multi cap

A multi cap fund under the new rules has to mandatorily invest a minimum of 25% each in mid and small cap stocks.

With mid and small cap stocks a lower AUM is ideal since it helps with overcoming the liquidity hurdle.

Which is another reason why large sized funds like Mirae Asset Large Cap Fund and Kotak Standard Multi cap fund tend to struggle after a sizeable increase in their AUM.

Additional reading: Click Here to read our complete review of Kotak Standard Multi cap fund

Difference between multi cap and flexi cap mutual fund

A flexi cap fund needs a minimum of 65% investment in equity.	A multi cap fund needs a minimum of 75% investment in equity.

No compulsory investment in mid and small cap stocks	A multi cap fund needs to compulsorily invest a minimum of 25% each in mid and small cap stocks.

It can invest its complete portfolio into large cap stocks if needed.	It can invest only up to 50% of its complete portfolio in to large cap stocks at any given time.

Needs a lower minimum exposure to equity as compared to a multi cap fund.	Needs a higher minimum exposure to equity as compared to a flexi cap fund.

Is it good to invest in multicap funds?

The most certain thing about a multi cap fund is that you can be sure that the fund at all times would be 25% invested each in large cap, mid cap and small cap stocks.

You can therefore be sure as to the investing methodology of the fund.

Needless to say, this would be on the more aggressive side since 50% would be invested in mid and small cap stocks.

Therefore, one needs to have patience and an appetite to go through periods of volatility since the fund will need 50% investment in mid and small cap stocks at all times.

Another point to keep in mind is that due to the compulsion of mid and small cap stocks, fund managers would more likely than not have a higher number of stocks in the portfolio as compared to earlier times when most multi cap funds would have around 40-50 stocks on an average.

A multi cap fund can find place in a portfolio if you can analyse and understand the fund, have a portfolio that is aligned with your goals and you have the requisite patience and stability to stay invested in a volatile market.

The current style of investing in a multi cap fund is no more like the earlier times when fund managers could take refuge in large cap stocks during volatile times and increase exposure in mid and small cap stocks based on attractive valuations.

A fund manager would feel restricted in moving across different sectors and caps considering she needs to follow the new mandate of 25% minimum investment in each large, mid and small cap stocks.

Therefore it would be foolish and naïve as an investor if you expect your multi cap fund to function in the same manner as it would earlier.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.

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