Are multi-cap funds a good option amid pricey valuations?

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Mutli-cap funds are again finding favour among asset management companies (AMCs) as five fund houses since May have either launched or will soon come out with a scheme in the category.

HDFC Mutual Fund and Axis Mutual Fund will launch multi-cap schemes later in the month, while a new fund offer (NFO) by IDFC MF is open for subscription. Moreover, Aditya Birla Sun Life Multi-cap Fund and Kotak Multi-cap Fund were launched in May and September, respectively.

To be sure, multi-cap is not a new category and has been around for years. However, in September, the Securities and Exchange Board of India (Sebi) had introduced new asset allocation rules for multi-caps, mandating a minimum of 25% allocation each in large-, mid- and small-cap stocks.

In November 2020, the regulator launched a flexi-cap category for mutual funds, requiring them to invest at least 65% of the corpus in equity but having no restriction on investing in large-, mid- or small-cap stocks.

Consequently, there was a readjustment of funds between the two categories, wherein a few remained in the multi-cap category, while most moved to flexi-cap.

“As funds couldn’t meet the criteria in their multi-cap funds, a lot of them moved to the flexi-cap category. The fund houses are now launching multi-cap funds, as the category was vacant without any scheme. Instead of shifting the existing portfolio, it is easier to meet regulations in a new fund,” said Bhavana Acharya, co-founder,, a mutual fund research portal.

As per the latest report from Morningstar India, flexi-cap is the second-biggest category in the open-ended equity segment. Felxi-cap schemes had assets under management (AUM) of 2.15 trillion after large-cap funds ( 2.18 trillion), as of September end. Multi-cap funds had an AUM of 31,442 crore.

So, does it make sense to invest in multi-cap funds given the high market valuations and economic outlook?

“Under any circumstance, a 50% combined allocation in mid- and small-caps would be riskier than a flexi-cap fund and even a large and mid-cap fund. However, returns also rise with higher risk. But how higher allocation to riskier categories in multi-cap funds will impact returns when the market corrects, is difficult to be judged as this category is yet to see a couple of market cycles,” Acharya added.

According to experts, while building a portfolio, investors with a small risk appetite should have a small allocation to equities, while a medium-risk or slightly moderately aggressive investor can have component of mid-and small-caps in the portfolio.

“From a tolerance and suitability perspective, for a low-risk investor, going into direct mid- and small-cap funds are not preferred, so schemes like multi-cap and flexi-cap work,” said Tarun Birani, founder, TBNG Capital, a Sebi-registered investment adviser.

However, Birani gives more preference to the flexibility given the market conditions and suggests a pure large-, mid- or small-cap fund rather than a multi-cap or a small-cap fund, as small-caps and mid-caps look richly valued.

“Now the economies have started recovering, showing good GDP growth and inflation is also back in most of the economies. It looks like the market rally is the mid-to-late cycle now. This is the time to be more cautious. Therefore, one needs to be more exposed to large-cap or blue-chip category as well as global diversification. Also, one can book profits in their pure small-cap strategy, if they have already made money,” he added.

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