Should you invest in multicap mutual funds? Here’s how to decide

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 smallcap stocks, as reported by ETBureau.

Unlike more flexible categories, these funds are required to maintain exposure across segments, making them more vulnerable to volatility in smaller stocks.

Multicap schemes invest at least 25% each in large, mid and smallcap stocks, with the balance at the fund manager’s discretion. Fund managers can choose stocks across sectors, subject to these market-cap allocations.

These funds are better suited for investors who are willing to stay invested across market cycles and are comfortable with higher exposure to mid and smallcap 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.

In flexi cap or value funds, managers can shift allocations depending on market conditions, but the multicap 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, multicap funds tend to be more volatile than largecap or flexicap funds. During corrections, sharper declines in smaller stocks can result in deeper drawdowns for multicap portfolios.