Dynamic Asset Allocation Vs. Multi-Asset Vs. Multi-Cap Funds: Differences

There are tons of mutual fund categories in India now. Due to the recently announced changes in the new Multi-Cap fund allocation rules, there has been some confusion among investors with reference to the differences between Dynamic Asset Allocation funds Vs. Multi-Asset funds Vs. Multi-cap funds.

So here is a brief explainer of these categories to clarify things:

  • Multi-Cap Funds – These funds now have minimum 75% equity exposure, plus with the new additional mandate of having at least 25% in each large-cap, mid-cap and small-cap stocks.
  • Multi-Asset Funds – These are required to have a minimum 10% in each of the 3 assets: equity, debt and gold. Holding foreign securities is not permitted under this category.
  • Dynamic Asset Allocation Funds (or Balanced Advantage Funds) – These come under hybrid category but have the option (or freedom) of actively managing their equity and debt allocation depending on their strategy or market conditions. They can use their own discretion to increase or decrease the allocation to equities as and when they want. Unlike multi-cap funds (now), the dynamic asset allocation funds have the flexibility to invest across market caps in any percentage that they deem fit. SEBI currently does not mandate any upper or lower cap on the exposure this category can have in debt and/or equity. So theoretically, these funds can go from 0% to 100% in either equity or debt.

A month or so after the Multi-cap rule change, SEBI introduced a new category (link) which too comes into play of this discussion: Flexi-Cap Funds.

As per the new definition, the funds in Flexicap Funds category need to invest a minimum of 65% of their portfolio in equity. Interestingly, there is no restriction in terms of market-cap, i.e. fund manager is free to invest any proportion in large-caps, mid-caps and small-caps. (To know more about this, read Large Vs Mid Vs Small Cap stocks). This gives this category complete flexibility irrespective of market capitalisation of the portfolio stocks.

To know how these newly launched Flexicap funds differ from Multicap funds, read this detailed note on Flexicap Vs Multicap funds. After the announcement of this new category, now many multi cap have become Flexi cap funds.

Other popular equity fund categories are Large Cap funds, passive Index funds and sector funds, etc. By the way, if you are contemplating between going the passive route instead of the active funds, then you may also want to read Should I switch from active Large-cap funds to index funds?

But do note that when it comes to properly managing your personal finances, you need to know how to use different mutual funds for different financial goals.

So that’s it. And that is how a multi-cap fund differs from a dynamic asset allocation fund and multi-asset allocation fund in India.

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