What is Multicap Mutual Fund and Why You Should Invest in it

Last Updated: 14 Jun 2024

Today when you talk of multi-cap mutual funds, there are two names that will obvious come to mind. There are the traditional multi-cap funds which has a restricted permission to invest in large caps, mid-caps and small caps. The other option is to opt for a flexi cap fund in the Indian context where the fund manager has much greater leeway in deciding on the opportunistic mix of the fund between large caps, mid-caps and small caps.

The idea of multi-caps is to offer investors a combination of large caps, mid-caps and small caps. If you look at the 3 indices in the year 2021, the large cap Nifty has given 23.8% returns, mid-cap index has given 41% returns while the small cap index has given 57.4% returns. As you go from large caps to mid-caps to small caps, the risk increases but so does the potential for higher returns.

How are multi-caps different from flexi-caps?

Both these classifications have existed for quite some time. However, early this year, SEBI underlined the need for fund names to better reflect the core purpose of the fund. Hence a multi-cap fund must be a pre-determined mix of large caps mid-caps and small caps. The leeway to the fund manager is very limited. Investors who do not want much leeway for the fund manager can opt for multi-cap funds.

However, in the case of small caps and mid-caps, the liquidity and impact cost may be unfavourable. Hence that is resolved by the flexi cap funds. Here in flexi-cap funds, the investors have the leeway to opt for giving greater leeway to the fund manager to decide upon the mix of assets. Such are more suitable for investors who are more willing to trust the discretion of the fund manager.

What have been the returns on multi-cap funds in the past?

Let us look at multi-caps in terms of historical returns. Here we present the returns on top performing funds on a 1 year basis, but also cover their longer term returns for 3 years and 5 years for a clearer picture of strategic performance.

Scheme Name	NAV Direct	Return 1 Year (%) Direct	Return 3 Year (%) Direct	Return 5 Year (%) Direct	Daily AUM (Cr.)
Quant Active Fund	433.41	58.68	33.84	26.9
Mahindra Manulife Multi Cap	22.69	53.51	28.19		918.84
Nippon India Multi Cap Fund	155.54	49.87	15.79	16.77	10,919.56
Baroda Multi Cap Fund	192.12	49.14	25.36	19.36	1,165.86
Principal Multi Cap Growth Fund	259.03	47.35	21.44	19.87	878.13
Invesco India Multicap Fund	92.14	42.54	22.08	19.18	1,778.58
BNP Paribas Multi Cap Fund	87.48	40.35	21.65	18.48	585.44
Sundaram Equity Fund	17.33	39.64			865.62
ICICI Prudential Multicap Fund	482.92	37.62	17.52	16.3	6,479.59
ITI Multi Cap Fund	14.52	21.85			328.83

Multi cap funds have assets under management (AUM) of Rs.23,920 crore and is a small participant in the overall scheme of things. Clearly, if you look at the longer term returns also, they tend to outperform the large cap indices dur to strategic exposure to mid-cap and small cap stocks.

What have been the returns on flexi-cap funds in the past?

Let us look at flexi-caps in terms of historical returns. Here we present the returns on top performing funds on a 1 year basis, but also cover their longer term returns for 3 years and 5 years for a clearer picture of long term value.

Scheme Name	NAV Direct	Return 1 Year (%) Direct	Return 3 Year (%) Direct	Return 5 Year (%) Direct	Daily AUM (Cr.)
BOI AXA Flexi Cap Fund	20.66	48.53			177.56
Parag Parikh Flexi Cap Fund	54.46	46.97	31.27	24.13	19,933.09
PGIM India Flexi Cap Fund	30.11	46.45	31.47	24.24	3,264.08
Franklin India Flexi Cap Fund	1,041.48	41.32	19.83	17.01	10,164.84
IDBI Flexi Cap Fund	38.97	38.44	20.7	18.21	391.9
Union Flexi Cap Fund	36.67	38.27	23.68	18.74	915.55
Edelweiss Flexi Cap Fund	25.33	37.07	20.74	20.18	910.19
HDFC Flexi Cap Fund	1,041.07	37	16.34	16.17	26,430.62
HSBC Flexi Cap Fund	146.66	35.51	19.46	16.75	404.92
Navi Flexi Cap Fund	17.41	35.42	20.17		208.26
UTI Flexi Cap Fund	279.85	35	26.13	22.23	25,008.31
Canara Robeco Flexi Cap Fund	246.27	34.4	23.57	21.58	6,598.19
JM Flexicap Fund	56.52	33.98	20.89	18.88	189.47
DSP Flexi Cap Fund	72.01	33.87	23.73	20.02	7,656.24
IDFC Flexi Cap Fund	149.08	33.15	16.82	15.3	6,005.20
SBI Flexicap Fund	82.19	32.05	19.22	17.54	15,585.61
Aditya Birla Sun Life Flexi Cap	1,251.97	31.38	18.98	17.14	15,972.37
Axis Flexi Cap Fund	20.75	29.93	23.24		10,878.06
Tata Flexi Cap Fund	17.24	28.33	19.01		2,193.39
L&T Flexicap Fund	127.21	27.25	15.27	14.75	2,936.09
Kotak Flexicap Fund	57.18	26.59	17.43	17.11	37,660.57
Shriram Flexi Cap Fund	15.56	22.64	15.08		65.4
Taurus Flexi Cap Fund	151.76	22.13	10.74	10.58	248.82
LIC MF Flexi Cap Fund	71.98	21.34	15.6	12.8	424.71
Motilal Oswal Flexi Cap Fund	37.09	16.33	12.13	13.62	10,832.35

Flexi cap funds have assets under management (AUM) of Rs.205,056 crore and is a very major participant in the overall scheme of things. Clearly, if you look at the longer term returns also, they tend to outperform the large cap indices due to strategic exposure to mid-cap and small cap stocks along with the benefit of flexibility.

How to make a choice of multi-caps / flexi-cap funds?

There is merit in creating a hybrid portfolio of large caps, mid-caps and small caps for better alpha. The alpha generated by such a portfolio is higher. Should you buy large cap, mid-cap and small cap funds on your own? Or should you make it simpler by opting for multi-cap or flexi-cap funds? Here is how you make the choice.

• Do you prefer simplicity of management? In terms of simplicity, the multi cap or flexi cap fund makes the job easier for you. No worrying about identifying large cap funds, mid-cap funds and small cap funds and deciding on allocations. The multi-cap or flexi-cap fund manager does the allocation on your behalf, and they do it profitably.
• Which is better approach for diversification? In terms of diversification, both approaches work well. Of course, if you opt for doing it on your own then you can do the allocation of your choice in consultation with your financial advisor. However, the multi-cap or flexi-cap fund does the diversification and also monitors in a more systematic way.
• What about my own flexibility? Will that be lost in multi-cap and flexi-cap funds? Any benefit of professional management has some compromise from your side. The multi-cap fund managers will typically adopt a median approach to investing in a mix of large cap, mid-cap and small cap stocks. For example, if you are over 50 and do not have appetite for small cap stocks, you can do it better than a multi-cap fund. But it is complex.
• There is an interesting aspect about fund manager DNA here. What exactly is that? This is perhaps the one point that makes a case against multi-cap funds. Fund management is about DNA. The DNA of a large cap manager is different from that of a mid-cap fund manager and from a small cap fund manager. One is more top down while the other two are more bottom up. These are two different levels of specialization that is called for and a multi-cap fund actually tries to create a fund manager who is more generalized and less specialized.

However, one big advantage that multi-cap and flexi cap funds bring about is simplicity. You just get a product off the shelf, which does pretty well if you look at historical market returns. The bottom-line is multi-cap funds give you simplicity to the extent that they do not require any monitoring or active management from your side. More importantly, these multi-cap and flexi-cap funds provide inbuilt diversification without any effort from your side. That is worth the while.