Table of Contents
Table of Contents
If you were to inquire of a regular investor about the most effective method for achieving favourable returns with reasonable risk, they would not recommend placing all their wealth into a single stock. Rather, they would probably propose constructing a diversified portfolio of different securities. The reasoning behind this suggestion is that diversifying investments assists in mitigating overall risk. After all, few are fond of unnecessary risks. Hence, the prudent decision would involve opting for diversified investments.
This is where multi-cap mutual funds come into play. As an investor, you need not go through the hassle of purchasing individual shares from various companies. Instead, you can benefit from a diversified portfolio by investing in a multi-cap mutual fund. Interested in understanding how this operates? Let’s delve deeper and understand what a multicap fund is..
What Exactly Are Multi-Cap Mutual Funds?
Let’s begin by the multicap fund meaning. It denotes a mutual fund that allocates investments across companies with diverse market capitalizations, encompassing large-cap, mid-cap, and small-cap firms. For further insights into various types of mutual funds, you can discover additional information about large-cap, mid-cap, and small-cap mutual funds here.
While investments in large-cap, small-cap, or mid-cap mutual funds are confined to their respective categories, a multi-cap fund empowers the fund manager to distribute investments across all three categories of firms. Isn’t this better than just being restricted to a single market type?
This flexibility also empowers the fund manager to seize opportunities across the entire market whenever they emerge. This diversified approach also fulfils the most prevalent objectives in an investor’s Investment Policy Statement (IPS), which revolve around achieving enhanced returns while managing the risk of volatility.
How Multi Cap Funds Operate?
Each equity mutual fund channels the pooled funds from its investors into company stocks.
Under regulatory guidelines, mutual funds are required to adhere to specific investment criteria. For instance, large cap funds are restricted to investing in the top 100 companies based on market capitalization. Similarly, small cap funds focus on companies ranked below 250, and so forth.
However, the multi cap category stands out as the only one without rigid regulatory boundaries dictating the size and sector of investable companies. Consequently, these funds allocate investments to stocks across large cap, mid cap, and small cap categories. The distribution of these stocks can vary, contingent on the discretion of the fund manager. The manager considers market conditions and consequently adjusts the proportions of large cap, mid cap, and small cap stocks within the portfolio of a multi cap mutual fund.
During periods of economic expansion, the fund manager may increase exposure to mid cap and small cap stocks to capitalise on their rapid growth. Conversely, in times of economic slowdown, a higher proportion of large cap stocks might be favoured.
Types of Multi Cap Funds
Although they lack distinct titles, multi-cap funds can be broadly categorized into the following groups:
Funds Focused On Large-Cap Stocks – These strategies primarily concentrate on investments within the large-cap category and subsequently explore potential in mid/small-cap sectors.
Funds Focused On Small/Mid-Cap Stocks – These strategies aggressively seek investment openings in the small/mid-cap categories, considering large-cap stocks primarily as a protective measure against potential declines.
Without Any Specific Emphasis On Capitalisation – These strategies scour investment prospects across various market capitalizations, with a clear intent to identify stocks capable of surpassing market performance.
Taxation of Multi Cap Funds
Ultimately, it’s the after-tax returns that hold significance. Understanding the taxation of multi cap mutual funds is essential in determining this outcome. The capital gains arising from the sale of your multi cap fund holdings are subject to taxation based on the duration of your investment.
Short-Term Capital Gain Tax (STCG):
If you sell your investments within one year, the resulting gains fall under the category of Short-Term Capital Gain (STCG), attracting a 15% tax.
Long-Term Capital Gain Tax (LTCG):
Conversely, investments in multi cap funds held for over a year are categorised as Long-Term Capital Gain (LTCG). Gains up to 1 lakh in a financial year are exempt from taxation. Gains beyond 1 lakh are subject to a 10% tax rate.
In addition, starting from July 1, 2020, any mutual fund units obtained through purchasing actions, whether they stem from lump-sum investments, SIP, STP (purchase transactions), switch-ins, or dividend reinvestments, will incur a stamp duty charge of 0.005% based on the invested amount. The transfer of mutual fund units, including moves between demat accounts, will require a stamp duty payment of 0.015%.
Latest SEBI Guideline On Multi-cap Fund Investments
In September 2020, a notable change occurred regarding multi-cap schemes as mandated by the Securities and Exchange Board Of India (SEBI). The alteration necessitated that these schemes maintain a minimum investment of 25% in each of the large-cap, small-cap, and mid-cap companies. This adjustment was prompted by the observation that a significant portion (approximately 75%) of the fund corpus was being allocated to large-cap companies. In contrast, exposure to mid and small-cap enterprises remained notably limited.
What To Consider Prior to Investing in Multi-Cap Funds?
Take a good look at the following aspects before investing in multi cap funds.
Investment Objectives
Prior to entering into these funds, one must have a clear grasp of their investment objectives. To maximise returns from multi-cap mutual funds, a minimum investment horizon of 5 years is advisable.
Risk Factor
Investing in multi cap funds essentially means placing funds in the stock markets, thereby exposing one to the associated risks. Short to medium-term market volatility should be acceptable to potential investors before they contemplate investing in these funds.
Expense Ratio
Understanding the deductions that impact returns is crucial. Multi cap funds necessitate payment of an expense ratio, a fee charged by the asset management company to cover administrative and operational expenses, including the fund manager’s remuneration. This fee is assessed annually.
Benefits of Multi Cap Fund Investment
Here are the advantages of multi cap funds.
Diversification
Multi cap funds spread investments across various company sizes and sectors, yielding a diversified portfolio. This diversification strategy mitigates risk, as different sectors or market segments can perform differently at any given time, thereby reducing overall risk.
Exposure to Key Economic Sectors
Given their lack of restriction to specific market caps or sectors, these funds offer exposure to the crucial sectors and companies propelling the growth of the Indian economy. This ensures that investors don’t overlook any opportunities available within the Indian market.
Optimal Portfolio for Market Conditions
The flexibility to determine the balance between large, mid, and small-cap holdings empowers these funds to adapt portfolio composition to prevailing market conditions. For instance, if mid and small-cap stocks become overvalued and indicate potential turmoil, the fund manager can transition to large-cap positions, adopting a defensive stance.
Conclusion
Multi-cap funds invest in a wide range of stocks having diverse capitalisation and spread across various sectors. Choosing large-cap funds may limit your exposure to the potential of smaller and medium-sized companies during favourable market conditions, while choosing mid-cap funds may tie you to medium-sized equities even during market downturns. The optimum blend of all market capitalizations is provided by multi-cap funds, on the other hand, enabling you to get favourable returns while keeping a healthy balance between risk and reward. Several firms, like Share India are thus offering a large pool of multi cap funds.
