Mutual funds can be classified on the basis of size of companies in which they invest. Two common types are Multi Cap Funds and Large Cap Mutual Funds.
Both types invest mainly in shares. But they are different in their asset allocation, their risk levels and their return patterns. Knowing the differences will help investors choose a fund that fits their financial goals, investment time horizon and risk tolerance.
What Are Multi Cap Funds?
Multi cap funds are funds that invest in large cap, mid cap and small cap companies.
According to the Securities and Exchange Board of India or SEBI, these funds need to invest at least 75 per cent of the total assets in equity and equity-related instruments.
They should set aside at least:
25% to large cap stocks
25 % Mid cap stocks
25% in small-cap stocks
The balance part may be invested as per the stated investment strategy of the scheme.
This structure gives exposure to Multi cap funds to companies of various sizes. Large companies may provide stability and established operations. Mid cap and small cap companies can offer growth opportunities, but can also see volatile price swings.
The fund manager can select companies in each category. The 25% minimum to each market-cap segment must, however, be maintained.
What Are Large Cap Mutual Funds?
Large Cap Mutual Funds invest primarily in large cap companies.
According to SEBI rules, these funds must invest at least 80% of their total assets in large cap stocks.
Large cap companies are usually the top 100 companies sorted by full market capitalisation. The list of companies that fall under the large cap, mid cap and small cap categories is released by the Association of Mutual Funds in India or AMFI.
Big companies are usually well known, have lots of customers and have been in business for a long time. But their share prices can still decline on poor earnings, industry headwinds, economic conditions or high market valuations.
The remaining 20% of the portfolio may be invested in such other assets as are permitted by the scheme documents.
Differences between Multi Cap Funds and Large Cap Funds
1. Portfolio Asset Allocation
Multi cap funds will have to invest in large cap, mid cap and small cap stocks. Each category must constitute at least 25% of the portfolio.
Large Cap Mutual Funds are required to invest minimum 80% of their assets into large cap companies.
Thus, Multi cap funds will provide exposure to companies of all market sizes and large cap funds will be only concentrated in established companies.
2. Level of Risk
Multi cap funds are vulnerable to the risks of all the three market-cap segments.
There may be sharp price movements in mid cap and small cap stocks. Smaller companies may also have less financial resources, lower trading volumes or volatile revenue and profit.
Large cap funds invest primarily in well-established companies. They may have lesser volatility of their share prices in some phases of the market. But they are still equity funds and they are still subject to market risk.
Neither category can assure a return or protect the amount invested.
3. Return Pattern
Multi cap funds are able to benefit from good performance in different areas of the stock market.
For example, small cap stocks may go up in one phase of the market while large cap stocks may act differently in another phase. The total return of the fund may be impacted by exposure to all three groups.
The returns of Large Cap Mutual Funds are largely dependent on the performance of the top 100 companies in terms of market capitalisation.
Company earnings, sector trends, interest rates, economic conditions and stock valuations can affect returns.
4. Flexibility
Multi cap funds invest in companies of various sizes. This reduces reliance on one market-cap segment. However, diversification does not eliminate market risk.
Large cap funds could have exposure to sectors like banking, information technology, healthcare, energy and consumer goods. However, most of their equity exposure remains to large cap companies.
5. Suitability of Investment
Investors who can handle the volatility in prices that comes with mid cap and small cap stocks may want to consider multi cap funds. Such money may need to be invested over a long period of time to cope with short-term market fluctuations.
Large Cap Mutual Funds are generally suitable for investors who want to get equity exposure through established companies only.
Whether it is the one or the other, the investment decision depends on the investor’s financial goal, risk capacity and investment horizon.
How To Compare These Funds
Here are the steps that investors can follow while comparing Multi cap funds and Large Cap Mutual funds:
Step 1: Read scheme documents
Please read the Scheme Information Document. Review investment objective, asset allocation, benchmark and risk level.
Step 2: View the Portfolio
View latest portfolio disclosure. View the distribution of large cap, mid cap and small cap companies.
Step 3: Cost Comparison
Check the expense ratio and exit load. Such charges may impact the final value of an investment.
Step 4: Review your past performance
Check out rolling returns over various time periods. Don't judge a fund only on its recent returns. Past performance is not indicative of future results.
Step 5: Review Your Portfolio Concentration
Look at the dollar amount invested in leading companies and sectors. A fund can still have a concentrated portfolio and adhere to its category rules.
Step 6: Match the Goal to the Fund
Pick a fund that suits the investment objective and timeline. A recent rise in returns should not be the sole factor for selecting a scheme.
Example of a Simple Allocation
Let’s say a Multi cap fund has assets of ₹100.
It must, at a minimum, spend:
Large cap stocks Rs.25.
₹25 in mid cap shares
₹25 in small-cap shares
The balance ₹25 can be invested in accordance with scheme’s investment strategy. Let us now assume a large cap fund has ₹100 as assets.
It has to invest minimum of ₹80 in large cap stocks. The balance of ₹20 can be invested in other permitted assets.
Conclusion
The primary difference between Multi cap funds and Large Cap Mutual Funds is their required asset allocation.
Multi cap funds invest in large cap, mid cap and small cap companies. Large cap funds invest mainly in the top 100 companies in terms of market capitalisation.
Both have risk in the equity market. Before making a decision, investors should review the fund’s portfolio, costs, risk level, investment objective, and time horizon.
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