Why you can consider multi cap funds as your next investment option in 2025

Multi cap funds invest in stocks across market capitalisations – small, mid and large cap stocks, allocating at least 25% of their portfolio to each segment. This diversification allows investors to combine the growth potential of smaller companies with the relative stability of established large cap firms. As we near the financial year 2025-2026, let’s see why multi cap funds can be a suitable investment choice for long-term equity investors.

• Table of contents

1. What are multi cap funds
2. Benefits multi cap mutual funds
3. Risks of multi cap mutual funds
4. Are multi cap mutual funds right for you?
5. Importance of a long investment horizon
6. Multi cap vs flexi cap funds: Key differences
7. Steps to invest in multi cap funds

What are multi cap funds

Multi cap mutual funds must invest a minimum of 75% of their corpus in equities. Out of the equity allocation, they invest a minimum of 25% each in large, mid and small cap stocks. The remaining portion can be allocated to any market cap as per fund manager's view. The fund manager may also choose to invest a small portion in debt securities.

The flexibility to invest across market caps allows tapping into the growth potential of mid and small caps along with the relative stability of large caps. Thus, a multi cap fund holds well established large companies as well as emerging mid and small companies to balance risk and reward.

Benefits multi cap mutual funds

• Diversification across market caps - Multi cap funds invest in large, mid and small cap stocks. This mitigates overall portfolio risk and provides relative stability.
• Growth potential of small and mid caps - Small and mid cap stocks have potential to grow more than large caps in bull markets. Multi cap funds help tap into this growth.
• Allows tactical allocation - Fund manager can shift allocation between large, mid and small caps based on prevailing market conditions (while maintaining at least 25% allocation in each market cap)
• Single window for diversification - An investor can simply invest in a multi cap fund instead of funds dedicated to specific market caps.
• Professional management – Multi cap funds and professionally managed and fund managers with skills and resources analyse stocks across market caps to design and alter the portfolio in response to performance, growth potential, market conditions and other factors.
• Liquidity and transparency - Open ended structure of multi cap funds allows easy entry and exit. Funds regularly provide detailed portfolio disclosures.

Risks of multi cap mutual funds

Despite their benefits, multi cap funds, like all market-linked investments, carry certain risks.

1. Market volatility: Since multi cap funds invest in all market capitalisations, they are exposed to significant market fluctuations. During a downturn, all segments may decline, impacting returns.
2. Higher mid and small-cap exposure risk: Mid and small cap stocks can be more volatile than large cap stocks. A significant allocation to these can lead to more fluctuation in portfolio value, especially in the short term.
3. Fund manager’s strategy: The performance of a multi-cap fund depends on the fund manager’s ability to balance allocations across different market caps.
4. Allocation limits: Multi cap funds are mandated to invest at least 25% each in large, mid, and small-cap stocks. This restriction may force the fund to stay invested in certain segments even when market conditions are unfavourable.

Are multi cap mutual funds right for you?

Multi cap funds are suitable for investors who:

• Seek diversified broad market exposure through a single equity fund instead of multiple funds for specific market caps
• Have investment horizon of at least 5 years to ride out market volatility
• Want equity exposure across market capitalisations to balance risk and return potential
• Can tolerate the volatility that comes with mid and small cap exposure
• Seek professional management of investments across market caps

Importance of a long investment horizon

Multi cap funds carry a higher risk than large cap funds due to exposure to mid and small caps. While this can enhance returns over the long term, it also brings volatility. To potentially ride out this volatility and benefit from compounding, investors should have an extended investment horizon of at least 5-7 years. A long-term horizon allows investors to tap into the growth potential of equities while tiding over the short-term ups and downs of the markets.

Multi cap vs flexi cap funds: Key differences

While both multi cap and flexi cap funds invest across small, mid and large caps, there are some important differences between the two, listed below:

• Multi cap funds must invest a minimum of 75% in equities, with a minimum of 25% each in large, mid and small cap stocks from the equity portion. Flexi cap funds need to invest a minimum of 65% in equities but have the flexibility to decide how much to invest in in each segment.
• Multi cap funds offer disciplined exposure across market caps, while flexi cap funds may take concentrated bets.
• Flexi cap funds may be able to achieve a more optimal risk-return balance as they can flexibly alter their asset allocation based on market movements.

Steps to invest in multi cap funds

Here is a step-by-step process to start investing in multi cap mutual funds.

• Evaluate your risk appetite, investment horizon and goals
• Shortlist funds
• Analyse portfolio composition, investment strategy, risk-adjusted return metrics and historical performance* across market cycles.
  *Past performance may or may not be sustained in the future.
• Choose between Systematic Investment Plan (SIP) and lumpsum.
• Decide an investment amount based on your income and expenses and increase over time.

Conclusion

While volatility is inherent in equities, multi cap funds help balance risk and return potential through diversification across market caps. They also offer broad diversification through a single investment. Multi cap funds have the potential to optimise the relative stability of large caps with the growth potential of mid/small caps based on prevailing market conditions. However, market risks apply and a long investment horizon is important to potentially tide over short-term volatility. Evaluate your risk appetite before investing.

FAQs

What is the multi cap mutual funds meaning?

Multi cap mutual funds are equity funds that invest across small, mid and large cap stocks. As per regulatory guidelines, they must invest a minimum of 25% each in large, mid and small cap stocks. The balance portion can be invested at the fund manager's discretion. This diversification helps balance risk and return potential.

Are multi cap funds risky?

Multi cap funds can carry higher risk compared to large cap funds but lower risk than mid or small cap funds. The presence of mid and small cap stocks, which are more volatile, leads to higher risk, but large cap exposure provides relative stability to a portion of the portfolio. Investors should have a high risk appetite and long investment horizon suitable for equity exposure across market caps.

What is the difference between large cap and multi cap?

Large cap funds must invest at least 80% of equity portion to large cap stocks. Multi cap funds invest minimum of 25% each in small, mid and large cap stocks, providing diversification across market caps. While the large cap component provides relative stability, the mid/small cap allocations enhance return potential.

What are the benefits of multi cap?

Key benefits of multi cap funds include diversification across market caps to balance risk and return potential, ability to tap into growth potential of mid/small caps, flexibility in allocation between segments, a single fund solution for equity exposure, and professional management of investments across market caps.

What are the disadvantages of multi cap funds?

Disadvantages of multi cap funds include exposure to market risk and volatility, higher risk than large cap funds and lower return potential than mid or small cap funds in some market cycles. Additionally, they need to maintain at least 25% allocation each to large, mid and small cap stocks in all market conditions, which can limit their flexibility in tapping into growth potential or mitigate risk in certain scenarios.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.