Multi-cap Funds – Growing acceptance driven by performance
This approach towards diversification can help to reduce the risk, as different sectors and market caps tend to perform differently at different times
Multicap funds are one of the most diversified types of equity mutual funds, as they invest across market capitalizations i.e. with minimum of 25% in Large cap, Midcap & small cap each and balance 25% allocation as per the discretion of the fund manager. This approach towards diversification can help to reduce the risk, as different sectors and market caps tend to perform differently at different times.
It can be taken as one of the simple route to create a diversified portfolio with exposure to all market capitalization through a single fund. Let’s say you are an investor who is looking to take exposure to small, mid and large cap funds. One of the approach could be that you do you own research and select funds across these categories and then deploy funds individually to the chosen funds. This approach however would require you to research all the available options, track performance of each funds, shortlist funds, make multiple investments and timely adjust your portfolio to maintain the balance. While doable, this can be time-consuming and complex and the balancing activity might require constant attention and engagement.
On the other hand, you can simply zero down your research on available Multi-cap funds and finalize the better performing funds to take exposure. Here, the construct of the fund itself ensures there is minimum representation of all the three-market capitalization and the balance being deployed as per the selected market opportunities as per the experience and understanding of fund manager.
The Asset Under Management of the Multi-cap funds as on 30th September 2023 stood at around 94,000 Crores, though the lowest amongst Large, Mid, Small and Flexicap funds, the market acceptance of the Multi-cap funds is increasing. As on 30th September, 2023, the AUM of Multi-cap funds has increased by over 39% next only to Small cap category at 49% as compared to the AUM on 31st March 2023. This is further corroborated from the fact that the number of schemes in the Multi-cap category has increased from 14 as of 31st March 2021 to 22 as on 30th September, 2023, the highest growth amongst the category followed by Flexicap category.
The interest is also evident in the returns delivered by the as against the flexicap and large cap category. Mult-cap category average returns over the 3 years period (as on 30th September 2023) has been 28.34% as against 23.67% in the flexi-cap category average over the same period. The return has been more or less in line with the Mid-cap category at 28.84%, however is much lower than the category average seen for small cap funds at 34.85% over the same time frame. The relative performance and the growth over the last couple of years, does provides a compelling case for looking at this segment positively as part of the portfolio.
In conclusion, Investors who wish to remain invested across market capitalizations irrespective of the market cycles with a fixed percentage allocation in small cap, mid cap and large cap companies, can choose Multi cap funds. It is a good way to take exposure to multiple market caps and should be taken as an automatic route for diversification with the added advantage of ease of portfolio construction and management over a long period of time. This also brings discipline in the investment approach and avoid any behavioural biases to exit funds based on performance/under performance of specific market caps. Investors who look at active management options can choose more funds, keeping Multi-cap as the core of the portfolio.
(Author is Partner and Co-Founder, Upwisery Private Wealth. Views are personal)
(Disclaimer: Stocks recommendations by experts or brokerages are their own and not those of the website or its management. Money9.com advises readers to check with certified experts before taking any investment decisions.)