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What is Multi Cap Mutual Fund & How it Works?
While looking for information on mutual funds, investors must have come across the terms of multi-cap mutual funds. Here, budding investors may get confused and start wondering how these investment instruments are different from popular large-cap mutual funds.
Multi-cap funds invest in large, mid, and small-cap companies. Due to this, multi-cap funds allow diversification across market caps in the portfolio. Read this article to learn more about multi-cap mutual funds, their types, and their benefits in detail to make informed investment decisions.
Table of Contents
What are Multi Cap Funds?
As the name suggests, multi-cap funds invest in stocks across market capitalization. To be precise, the portfolio of multi-cap funds comprises large-cap, mid-cap, and small-cap funds.
Now that individuals are aware of the meaning of multi-cap funds, let’s proceed to learn about their types, benefits, features, and many other things. Read along!
How Do Multi Cap Funds Work?
Investment in equity funds occurs by gathering money from investors and putting them in the stocks of companies.
Investment in mutual funds must have a specific approach as per the SEBI regulations.
A large-cap fund can invest in the stocks of the top 100 companies based on market capitalization. On the other hand, small-cap funds can invest in companies that have a ranking below 250.
However, in the case of multi-cap funds, there is no definite structure (set by regulation) regarding the size and sector of companies it can invest in. Thus, these funds can invest in large-cap, mid-cap, and small-caps. Here, the proportion can vary.
As per the SEBI guidelines, multi-cap mutual funds must have at least 75% of their assets in equity and equity-related instruments. In addition, the portfolio must allocate a minimum of 25% of its assets to large-cap stocks, 25% to mid-cap stocks, and another 25% to small-cap stocks.
Features of Multi Cap Funds
Below are the features of multi-cap funds.
1. Diversification
The primary feature and advantage of investing in multi-cap funds is diversification. Multi-cap funds are the only variant of an equity fund that invests across market capitalization. While investing in mutual funds, investors must not only focus on increasing returns but also on reducing risks. Here, multi-cap funds rightly fit in. Its diversified portfolio strategically balances the risk factor.
2. Returns
When it comes to generating profits, investors often get confused between large hybrid and index funds. However, multicast funds offer increased returns than large-cap funds, hybrid, and index funds. Returns from multi-cap funds depends on the fund manager. It is the fund manager’s expertise and research (for choosing stocks) that can benefit an investor.
3. Flexibility
As stated earlier, multi-cap funds invest across market capitalization. Here, the fund manager can enjoy the flexibility of investing in diverse market capitalization as per the market condition.
It means fund managers can invest in large-cap funds during high market volatility to reduce loss. On the other hand, they can choose small and midcap funds during a bull run. The fund manager’s choice in case of asset allocation can help to increase return or minimize risk.
Types of Multi Cap Funds
1. Multi-Cap Funds With Focus on Large-Cap Stocks
These funds focus on investing across large-cap companies and then look for opportunities in mid and small-cap companies.2. Multi-Cap Funds With a Focus on Mid/Small-Cap Stocks
These funds explore good opportunities in the mid and small-cap sectors and then move on to large-cap stocks to protect the portfolio from any downside risk.
3. No Specific Focus on Market Capitalization
These types of funds explore investment opportunities across market capitalization and focus on finding stocks that can outperform.
Who Should Invest in Multi Cap Funds?
Individuals having moderate risk tolerance, an investment horizon of a minimum of 5 years, and planning of wealth creation with a diversified portfolio over the long term can invest in multi-cap funds.
Multi-cap funds offer flexibility and diversification across market capitalization, thus helping investors earn decent returns by reducing risk.
What are the Risks Associated With Multi Cap funds?
From the above discussion, investors know that multi-cap funds invest in stocks of large-cap, mid-cap, and small-cap companies. These types of funds can be better than large-cap and mid-cap funds when the market is up. Also, these funds can generate decent returns from small-cap stocks during market rallies.
However, when the market is down, multi-cap funds can offer a cushion against negative market impact and reduced returns. Thus, these funds are less risky than midcap funds but more so than large-cap funds. Here, fund managers must wisely allocate assets as per the market condition.
In addition, multi-cap funds are susceptible to market volatility.
Wondering how?
Multi-cap funds have 50% exposure to mid-cap and small-cap funds. Even if fund managers wish to change asset allocation after evaluating that the market is going to remain down for a long time, they cannot reduce the percentage below 25 in any segment of market capitalization.
Factors to Consider Before Investing in Multi Cap Funds
Here is a list of factors that investors need to consider before investing in multi-cap funds.
1. Investment Horizon
Having investment goals is essential for any investment. If investors have an investment horizon of a minimum of 5 years, they can find multi-cap funds an ideal investment instrument.
2. Risks
While investing in a multi-cap fund, one must keep in mind that they are putting their hard-earned money in the stock market. Thus, they are exposed to risks associated with stock market conditions. However, in the case of multi-cap funds and due to the diversified portfolio, investors can invest with lesser risk when compared to investment in pure mid-cap or small-cap funds.
3. Performance of Fund Manager
As stated earlier, the experience and expertise of a fund manager can benefit multi-cap fund investors. Here, fund managers need to actively look for opportunities to diversify the portfolio to reduce risk and, at the same time, align with investment goals. To ensure the benefits of multicast investment, investors must assess the past performance of the fund manager.
4. Expense Ratio
To manage a multi-cap fund, the Asset Management Company (AMC) charges a fee known as the expense ratio. Multi-cap funds demand active management to churn out maximum profit from market opportunities. These types of funds have a higher expense ratio than pure large-cap or small-cap funds. However, the returns generated from these funds can duly compensate for the costs and charges.
5. Taxation
Taxation is another factor that investors must consider. When investors redeem multi-cap fund units, they become liable to pay capital gain tax for the capital gains made out of it.
If investors sell units of multi-cap funds in less than 1 year, they have to pay a 15% tax on them. These gains will fall under Short Term Capital Gains Tax (STCG tax).
On the other hand, if investors hold units of multi-cap funds for more than 1 year, the gains will be termed as Long Term Capital Gains Tax (LTCG tax). In case of gains of up to ₹ 1 lakh, investors need not pay any tax. For amounts above ₹ 1 lakh, the tax rate is 10% without indexation.
TDS@10% is deducted from mutual fund dividends. Investors have to consider this factor as well. Investors have to consider this factor as well.
Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.
We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.
FAQs about Multi Cap Mutual Funds
Do multi-cap funds have a lock-in period?
Can investors make a profit by only evaluating the historical performance of multi-cap funds?
Other Important Articles about Mutual Funds
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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