There are different types of equity funds based on the characteristics of portfolio companies. Some are based on the market cap of underlying stocks, a few are sectoral equity funds while some may have a separate investing strategy.
Here we will discuss differences and similarities between the two types of equity funds: multi-cap and focused equity funds. Both these funds can invest in funds across market capitalisations however they do have key differences.
Multi-cap equity funds are mutual funds that invest in companies of all market capitalization sizes.
Traditionally, multi-cap equity funds had a large-cap bias, with most holdings invested in large-cap companies. In September 2020, the Securities and Exchange Board (SEBI) had mandated multi-cap funds to invest 25% each in large-cap, mid-cap, and small-cap companies. This has led many multi-cap funds to sell some of their large-cap holdings and buy mid and small-cap companies to achieve SEBI’s recommended breakup.
Focused equity funds are mutual funds that invest in a limited number of stocks. As per SEBI’s guidelines, focused equity funds can invest in a maximum of 30 stocks. The number of stocks in a focused equity fund is much lower than a typical mutual fund that can hold 50 to 100 stocks. Like multi-cap funds, they can invest in large, medium, and small-sized companies. Focused equity funds make selective and carefully researched bets on a limited number of companies to maximize returns.
|Characteristics||Multi-Cap Equity Funds||Focused Equity Funds|
|Risks||Less risky than focused equity funds due to diversification||Riskier than multi-cap equity mutual funds that invest in many stocks|
|Growth potential||Offer lesser growth potential than focused equity funds||Offer a higher potential of growth if most stocks in the fund do well|
|Asset classes where the funds invest||As per SEBI’s guidelines, multi-cap funds should allocate their investments by company sizes as follows:
– Large cap: Minimum 25%
– Mid cap: Minimum 25%
– Small cap: Minimum 25%
|Can invest in up to 30 stocks of all company sizes
|Sectors||Invest in companies across sectors||Invest in a few sectors|
|Fund manager’s expertise||Like regular mutual funds, where the fund manager has to diversify the risk and pick companies of all sizes with high potential||Greater emphasis on fund manager’s skills and experience in choosing the 30 best stocks with the highest return potential|
|Theme||Less likely to focus on a specific theme||May adopt a specific theme such as ‘avoid PSU stocks’|
Both multi-cap equity funds and focused equity funds are taxed as equity funds. Short-term capital gains (made by selling units held for less than a year) are taxed at 15%. Long-term capital gains (made by selling units held for more than a year) are taxed at 10%. Long-term capital gains of up to Rs. 1 lakh are tax-free.
2. Allowed to Invest In Companies of Any Sizes
Both multi-cap and focused equity funds can invest in companies of all sizes. This is different from size-specific funds such as large-cap funds or mid-cap funds.
– Multi-cap funds can invest in several companies of all market capitalization sizes
– Focused cap funds can invest in a maximum of 30 companies of any market capitalization size
– Fund managers of focused cap funds must select companies carefully with extensive research to achieve maximum growth
– Multi-cap funds are less risky than focused cap funds
– Focused cap funds offer higher growth potential than multi-cap funds
– Multi-cap funds are suited for investors with a low-risk appetite, whereas focused equity funds are suited for investors with moderate-to-high risk appetite
Why are multi-cap funds less risky than focused equity funds?
The holdings of multi-cap funds are spread across many companies. If any of the portfolio companies do not do well, the impact on the portfolio is less severe. Focused equity funds are more vulnerable to the poor performance of portfolio companies as the risk is spread across a fewer number of companies.
How many focused equity funds can an AMC launch as per SEBI?
According to SEBI’s regulations, each asset management company (AMC) can have only one scheme under each category of mutual funds, such as large-cap funds, multi-cap funds, focused funds, etc. SEBI has created this rule to avoid confusion among investors.
Multi-cap and focused equity funds are two different types of equity funds suited for investors with different risk profiles. Multi-cap funds are less risky among the two types and offer a lower potential for growth. Focused funds are riskier between the two types and offer higher growth potential.
This blog has been contributed by IIFL AMC. Views expressed are not of Groww.