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Multi-cap funds invest in the stocks of various market caps. So, multi-cap funds will invest in small, medium, and large-cap stocks. As per the SEBI guidelines, a minimum of 25% of the assets will be invested in each (small, mid, and large-cap) category. The SEBI has defined the first 100 companies by market cap as large-cap companies, the next 101 to 250 companies by market cap as mid-cap companies, and companies after that as small-cap companies.
The objective of these funds is to generate maximum risk-adjusted returns by investing in stocks across various market cap categories.
These funds are suitable for investors with a high-risk appetite. They can be a good option for investors willing to generate high returns by investing in stocks across different market caps. But as these funds have to invest a minimum of 25% in each market cap (small, mid, and large), they have a lower degree of freedom in asset allocation compared to flexicap funds. They will have a higher level of volatility as at least 50% of the assets will be allocated to mid-and small-cap stocks. We believe that investors can avoid this category. We feel that flexi-cap funds are a far better option if investors want to take exposure to stocks of different market caps. We believe the same because fund managers have complete freedom over percentage allocation in flexi-cap funds.