Multi-cap funds: Come of age?

The initial three years for a mutual fund or fund category are seen as foundational. This is the critical time for experimentation and self-discovery, for them to put their investment strategy to test, and for them to face a baptism by fire. Hence, it would be unfair for us to judge them during this period. Only after this phase do we at Value Research rigorously assess their investment case. Recently, multi-cap funds crossed their three-year Rubicon with aplomb. During this time, they have seen their assets grow over 500 per cent, from Rs 18,046 crore in December 2020 to Rs 1.11 lakh crore in December 2023. The total assets swelled on account of high returns and increased investor participation. In fact, 60 per cent of the total assets (known as assets under management in investors' circles) zoomed on account of investors' money, primarily due to AMCs launching funds in the newly-formed category. These numbers throw shade on their rivals - flexi-cap funds . This is despite multi-cap funds being required to invest at least 25 per cent each in large-, mid- and small-cap stocks, whereas flexi-cap funds are relatively laissez-faire in nature. They can invest wherever they want with no investment limits. But despite their freedom to invest anywhere, flexi-cap funds' popularity have paled in comparison to multi-cap funds since 2021. Unlike the latter's meteoric rise, flexi-cap funds only doubled from Rs 2.08 lakh crore to Rs 4.51 lakh crore in a similar period, with just 34 per cent of the total assets increasing on account of investors' money. However, these are just the headline numbers. Let's also look at other metrics to evaluate the fitness of multi-cap funds.