What are multi cap funds?

What are multi cap funds?

Large-cap funds provide more stability and low-cap schemes give aggressive growth. According to the risk tolerance which cannot be easily defined as low or high or even medium, investment decisions are made. A large-cap, small-cap or mid-cap fund might not be in sync with one’s risk preference. That’s why Multi-Cap Mutual Funds are needed. 

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Multi Cap Funds

Multi Cap Funds invest their corpus in a portfolio of equity and equity-related stocks of companies with varying market capitalizations. It lets investments in large-cap, small-cap, and mid-cap companies in different proportions making it a good option to match one’s risk tolerance. The fund managers are restricted by the portfolio definition and they cannot invest in shares of a small-cap company even if the opportunity is lucrative. Multi cap funds are a better option for wealth creation as the fund managers can leverage investment opportunities. 

Types

  1. Multi Cap Funds with a focus on large-cap stocks primarily focusing on investing in the large-cap segment and then explore opportunities in the mid/small-cap sectors.
  2. Multi Cap Funds with a focus on small/mid-cap stocks aggressively looking for investment opportunities in the small/mid-cap segments and at large-cap stocks only to protect any downside.
  3. No specific focus on market capitalization offering investment opportunities across market capitalizations with a clear focus on finding stocks that can outperform. 

The best time to invest 

Observe from the following table that Multi Cap Funds have performed similar to Large Cap Funds in the last 7 years. Small cap funds and mid cap funds offer better returns than Large and Multi-Cap schemes. If the investment objective is wealth creation over the long-term and with a moderate risk tolerance, then consider Multi-Cap Mutual Funds. 

There are investors who can benefit from investing in multi-cap funds. The table below is a benchmark comparison of Equity schemes versus the S&P BSE Sensex Index:

Types of Equity FundsReturns
1 year3 year5 year7 year
Large Cap Funds28.87%7.84%11.85%8.30%
Multi Cap Funds28.87%7.84%11.85%8.30%
Small and Mid Cap Funds47.16%20.33%20.00%13.52%

Risks

  • These schemes are riskier and more volatile than large-cap schemes which invest primarily in big companies. 
  • The fund manager of a multi-cap scheme keeps looking for opportunities to boost the earnings of the portfolio and if he expects the markets to stay down for a long time, he might move the funds from stocks of mid/small-cap companies to large-cap companies.

Factors to be considered before investing 

  1. Portfolio Concentration

It is important to assess the portfolio concentration of the fund to ensure diversification as it carries a risk of being over-exposed to a particular sector which is chosen by the manager to invest in.

  1. Fund Manager

The fund manager plays a crucial role in the success of such schemes. Do some research on the past performance of the fund manager to know he has managed the multi-cap fund through periods of market ups and downs. 

  1. Tax Implications
  • Capital Gains Tax-It is applicable when there are profits on selling the units of the scheme. The rate of tax varies according to the period for which the units are held before selling them:

Short Term Capital Gain – Holding Period < 1 year. Tax rate = 15%.

Long Term Capital Gain – Holding Period ≥ 1 year. 

For LTCG up to Rs.1lakh no tax is applicable. For LTCG of greater than Rs.1lakh, the tax rate is 10% without indexation.

  • Tax deducted at source- TDS on dividend income paid in excess of Rs.5000 from any mutual funds shall be 10%. Due to Covid-19 it shall stand at 7.5% from 14 May 2020 until 31 March, 2021.

Multi Cap schemes offer diversification to investment portfolio and must be considered if they serve one’s financial goals, risk tolerance, and investment horizon.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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