Multicap funds gain traction, but risk from small-cap exposure persists

Multicap funds are drawing renewed attention after the recent correction in equity markets, with wealth managers pitching them as a one-stop route to invest across large-, mid- and small-cap stocks. But unlike more flexible categories, these funds are required to maintain exposure across segments, making them more vulnerable to volatility in smaller stocks.

WHAT ARE MULTI CAP FUNDS?
Multi cap schemes invest at least 25% each in large-, mid- and small cap stocks, with the balance at the fund manager’s discretion. Fund managers can choose stocks across sectors, subject to these market-cap allocations. Largecap companies are those ranked 1–100 by market capitalisation, mid-caps are ranked 101–250, and those beyond rank 250 are classified as smallcap companies. The category currently has 32 schemes, with 1.14 crore folios and assets worth `2.22 lakh crore.

HOW DIFFERENT IS A MULTI CAP FUND COMPARED TO OTHER POPULAR CATEGORIES LIKE FLEXI CAP?

Multi cap funds combine exposure to large-, mid- and small cap stocks within a single scheme, removing the need for investors to allocate separately across categories. However, unlike flexi cap or value funds, where managers can shift allocations depending on market conditions, multi cap funds are bound by regulation to maintain a minimum allocation to each segment. This limits the manager’s ability to move defensively during periods of market stress. With at least 50% of the portfolio structurally allocated to mid- and small-cap stocks, these funds tend to be more volatile than large cap or flexi cap funds. During corrections, sharper declines in smaller stocks can result in deeper drawdowns for multi cap portfolios.

WHO SHOULD CONSIDER MULTI CAP FUNDS?
These funds are better suited for investors who are willing to stay invested across market cycles and are comfortable with higher exposure to midand small cap stocks. They may appeal to investors seeking a single-fund approach across market capitalisations, but are less suited for those looking for downside protection during periods of volatility.