Investment decisions are often riddled with a series of challenging questions. Should you opt for large-cap funds for more stability or low-cap schemes for aggressive growth? While many investment experts recommend that you consider your risk tolerance before making such decisions, the fact is that our risk tolerance cannot be easily defined as low or high or even medium. Hence, a large-cap, small-cap, or mid-cap fund might not be in sync with your risk preference. This is where Multi-Cap Mutual Funds step in. We will now explore Multi-Cap Funds and look at various factors that you need to know about them.

What are Multi Cap Funds?

As the name suggests, Multi Cap Funds invest their corpus in a portfolio of equity and equity-related stocks of companies with varying market capitalizations. So, in a Multi Cap Fund, you will find investments in large-cap, small-cap, and mid-cap companies. Every scheme invests in different proportions making the Multi-Cap Fund category a good option to match your risk tolerance. 

When you invest in a large, small, or mid-cap fund, the fund managers are restricted by the portfolio definition. This means that a fund manager of a large-cap fund cannot invest in shares of a small-cap company even if the opportunity is lucrative. Hence, a multi-cap fund is considered to be a better option for wealth creation as the fund managers of these funds can leverage investment opportunities across the spectrum of the market. Also, every investor can find a multi-cap scheme in sync with his financial needs.

Types of Multi Cap Funds

While there are no specific names for them, multi-cap funds can be broadly classified into the following types:

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

When should you invest in a Multi Cap Equity Fund?

Before we talk about the types of investors who can benefit from investing in multi-cap funds, here is a quick look at the comparative performance of different types of equity funds. The table below is a benchmark comparison of Equity schemes versus the S&P BSE Sensex Index:

Types of Equity Funds Returns
1 year 3 year 5 year 7 year
Large Cap Funds 28.87% 7.84% 11.85% 8.30%
Multi Cap Funds 28.87% 7.84% 11.85% 8.30%
Small and Mid Cap Funds 47.16% 20.33% 20.00% 13.52%

As you can see above, Multi Cap Funds have performed similar to Large Cap Funds in the last 7 years. However, Small Cap Funds and Mid Cap Funds offer better returns than Large and Multi-Cap schemes.

If your investment objective is wealth creation over the long-term and you have a moderate risk tolerance, then you might want to consider investing in Multi-Cap Mutual Funds. These schemes offer a diversified approach to investing in the equity markets and endeavor to make the best of every investment opportunity.

What are the risks associated with Multi Cap Mutual Funds?

By the virtue of its definition, a multi-cap fund invests in stocks of large-cap, mid-cap, and small-cap companies. Hence, these schemes carry more risk than large-cap schemes which invest primarily in big companies. Also, the fund manager of a multi-cap scheme keeps looking for opportunities in the small and mid-cap segments to boost the earnings of the portfolio. Further, if he expects the markets to stay down for a long time, then he might move the funds from stocks of mid/small-cap companies to those of large-cap companies. In a nutshell, these schemes have a lot of volatility.

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Factors to consider before investing in a Multi Cap Fund

Apart from the performance of the scheme over the last 5-7 years, here are some factors that you must keep in mind before investing in Multi Cap Funds.

Fund Manager

A multi-cap fund invests in equity and equity-related instruments of companies across different market capitalizations. Also, the fund manager keeps looking for opportunities to diversify the investment to achieve the objectives of the scheme. Therefore, the fund manager plays a crucial role in the success of such schemes. Before investing, you might want to research the past performance of the fund manager across various schemes. Also, you must look at how he has managed the multi-cap fund through periods of market ups and downs.

Portfolio Concentration

As an investor, it is important to assess the portfolio concentration of the fund to ensure diversification. For example, if the fund manager is optimistic about the IT sector and invests a larger portion of the corpus in small, mid, and large-cap stocks of companies from this sector, then your portfolio carries a risk of being over-exposed to a particular sector.

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Tax Implications

When you redeem your Multi Cap Fund units, the capital gains made by you are subject to Capital gains Tax. Also, any dividend received by you is subject to Dividend Distribution Tax or DDT.

Dividend Distribution Tax (DDT)

All fund houses are mandated to deduct tax (DDT) of 10% before paying out dividends to unitholders.

Capital Gains Tax

Capital Gains Tax is applicable when you make profits on selling the units of the scheme. The rate of tax varies according to the period for which you held the units before selling them as explained below:

  • Short Term Capital Gain or STCG – Holding Period < 1 year. Tax rate = 15%.
  • Long Term Capital Gain or LTCG – Holding Period ≥ 1 year. 
    • For LTCG up to Rs. 1 lakh, no tax is applicable. 
    • For LTCG of greater than Rs. 1 lakh, the tax rate is 10% without indexation.

Please note that we do not recommend investing in these schemes but are merely providing a list of well-performing Multi Cap Funds, India. Multi Cap schemes offer diversification to your investment portfolio and must be considered if they align with your financial goals, risk tolerance, and investment horizon.

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