Multi Cap Funds: Types, Features & Benefits

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. This piece talks about multi cap funds. Stay tuned!

As the name suggests, multi cap funds invest in stocks across market capitalisation. 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!

Multi cap funds can be classified into three categories. These are as follows

• 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.
• Multi Cap Funds With a Focus on Mid/Small-Cap Stocks: These funds explore good opportunities in the mid and small-cap sector and then move on to large-cap stocks to protect the portfolio from any downside risk.
• No Specific Focus on Market Capitalisation: These types of funds explore investment opportunities across market capitalisation and focus on finding stocks that can outperform.

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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 top 100 companies on the basis of market capitalisation. 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.

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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 capitalisation, thus helping investors earn decent returns by reducing risk.

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 capitalisation. 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 and hybrid and index funds. However, multicast funds offer increased returns than large-cap funds, hybrid and index funds. Return 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 capitalisation. Here, the fund manager can enjoy the flexibility of investing in diverse market capitalisation 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 minimise risk.

From the above discussion, investors can know that the 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 riskier than midcap funds but more 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 the fund managers wish to change the asset allocation after evaluating that the market is going to remain down for a long time, they cannot reduce the percentage below 25 at any segment of market capitalisation.

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 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 on mutual fund dividends. Investors have to consider this factor as well. Investors have to consider this factor as well.

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