Why multi-cap mutual funds are new retail investor favourites

The broad market rally has led to mid and small-cap stocks doing well. Investors do not want to miss out on a potential upswing.

The S&P BSE Midcap has given 33 percent in the last one year, while the S&P BSE Smallcap has delivered about 60 percent in the same period.

Data from Value Research shows that the multi-cap fund category has been among the best-performing equity categories in the one-year period. The category has given 40.86 percent returns on an average. Only small-cap, information technology and infrastructure sector funds have done better.

Multi-cap funds were re-defined by regulator SEBI in 2020 and are now required to hold 25 percent each in small, mid and large-cap stocks.

As these funds will maintain at least 50 percent allocation to mid and small-cap stocks, these schemes may suffer higher volatility during market corrections.

What should investors do?

SEBI changed the allocation rules for multi-cap funds, as they tended to be large-cap heavy, with insignificant exposures to other segments. Later, mutual funds re-positioned their erstwhile multi-cap funds as flexi-cap schemes that allow fund managers to invest across market caps without any restrictions.

Multi-cap funds may do well when the broader markets rally, but tend to underperform if markets turn narrow and large-cap stocks lead the gains. During such periods, flexi-cap funds could outperform, as they can increase their large-cap exposure. Investors who did not participate during the NFOs can wait for the multi-cap category to develop a track-record before considering them.