Multi Cap Mutual Funds

Are you confused about whether to opt for large-cap funds to enjoy their stability or go for mid-cap and small-cap mutual fund schemes to gain from sharp capital appreciation? Investors who don’t want to restrict themselves and seek to reap the benefits of investing in large, mid and small-cap companies can consider a fund category known as multi-cap mutual funds. 

Multi-cap mutual funds have become popular over the years as they offer higher return scope, diversification benefits and better risk management. This article will explore in detail what are multi-cap funds, and other things you need to know about them. 

What are Multi Cap Funds?

As the name suggests, multi-cap mutual funds invest in companies across market capitalization. Unlike large-cap mutual funds that can invest in only the top 100 companies by market cap or small-cap funds that can take exposure to stocks which are ranked 251st and beyond on the stock exchange, multi-cap mutual funds can invest in all three categories of companies - large-caps, mid-caps and small-caps. This makes them versatile.

Multi-cap funds give fund managers the flexibility to adjust the proportion of their investment in large-cap, mid-cap and small-cap stocks according to the market conditions. Multi-cap funds offer a balanced approach between stable returns and long-term growth. 

Since a company’s market capitalization does not restrict multi-cap mutual funds, they are considered a good option for wealth creation as the fund managers have the scope to invest in the best companies across sectors and categories. 

How Do Multi-Cap Funds Work?

According to the guidelines by the Securities and Exchange Board of India (SEBI), mutual funds need to follow a specified investing strategy. The market regulator in September 2020 also specified the asset allocation across market segments for multi-cap mutual funds. 

Multi-cap mutual funds are required to hold at least 75% of investment in equity and equity-related instruments. They must allocate at least 25% of assets to large-cap stocks, 25% to mid-cap stocks and another 25% to small-cap stocks. The fund manager can invest the remaining 25% based on the type of funds and as per his/her preference. 

They are a great option for diversification and wealth creation but they also carry high risk as they have at least 50% of their total assets in small-cap and mid-cap stocks. Both of these stock categories are highly volatile and risky in the short term.

Best Multi Cap Mutual Funds

List of the top-performing multi cap mutual funds sorted by returns with their AUM and Expense Ratio.

Types of Multi-Cap Mutual Funds

Based on their asset allocation, multi-cap mutual funds can be categorised as follows:

Large-cap Focussed Multi Cap Funds: These types of multi-cap mutual funds allocate more than 25% to the large-cap category of stocks, as they seek stability. Their focus is to secure the portfolio first, and then chase growth opportunities in mid-caps and small-caps.

Mid/Small-cap Focussed Multi Cap Funds: This category of multi-cap mutual fund has a higher exposure to mid-caps and small-caps as they are looking for aggressive growth. Through exposure to large-cap stocks, they only seek to limit the downside risk.

No Specific Focussed Multi Cap Funds: These multi-cap mutual funds don’t target any specific category of stocks as their focus is to spot stocks that can outperform the market. 

Benefits of Investing in Multi Cap Funds

Investing in the best multi-cap mutual funds has the following advantages:

Diversification Benefits: By investing in multi-cap funds you can enjoy diversification benefits without any extra effort as these funds have a broad portfolio. They invest in companies across sizes and sectors. As different segments of the market can perform differently at a given amount of time, diversification helps in lowering risk. 

Better Returns: Over the last 5 years, multi-cap funds have given better returns than large-cap funds as they have exposure to mid-cap and small-cap stocks in addition to large-cap stocks. This allows multi-cap funds to tap the growth opportunities in smaller, faster-growing companies. 

Portfolio Balance: Multi-cap funds ensure portfolio balance by investing across various market capitalizations. These funds adjust the allocation among different categories based on market conditions, thus maintaining a balanced and well-rounded portfolio.

Risks of Investing in Multi Cap Funds

Multi-cap mutual funds are riskier and more volatile than large-cap funds as they have at least 50% exposure to mid-cap and small-cap stocks. Mid and small-cap stocks tend to perform poorly when the stock markets crash. So, even if during bearish market conditions, the fund manager reduces exposure to these companies, he/she cannot go below 25%. This makes them suitable for investors who have moderate to high-risk tolerance.

Things To Consider Before Investing in Multi Cap Mutual Funds

Consider the following factors before investing in a multi-cap fund:

Investment Goals: One important factor you should consider before investing in a multi-cap fund is your investment goal. To make the most of your investment in a multi-cap fund, you should not have a time horizon of less than 5-7 years. 

Investment Risk: Multi-cap funds are unsuitable for investors with a low-risk appetite as at least 50% of the equity portfolio of the scheme is invested in small-cap and mid-cap stocks. This can make a multi-cap fund volatile in the short term. Investors should evaluate their existing mutual fund investments and current exposure to the market cap segments before adding a multi-cap fund to their portfolio so that it aligns with their risk profile.

Expense Ratio: The expense ratio is a critical factor that can impact the performance of a mutual fund. It is the fee charged by the mutual fund house for their investment services. A higher expense ratio means a larger portion of the fund's returns will be eaten up by these fees, potentially reducing the overall profit for investors. Understanding and comparing expense ratios is essential for investors to optimise their long-term investment performance.

Who Should Invest in Multi Cap Funds?

After understanding the features and factors affecting multi-cap mutual funds, let’s look at the investors for whom multi-cap funds are suitable:

Investors in dilemma: For investors confused about whether to go for the stability of large-cap companies or the growth scope of mid and small-cap companies, multi-cap funds can be an ideal investment option. A multi-cap fund provides both stability and growth as it invests in companies across market capitalizations. 

Investors with long-term investment horizon: Multi-cap funds are suitable for investors with a long-term investment horizon of 5-7 years. You can invest in a multi-cap fund to achieve a long-term investment goal such as buying a house, children’s education, early retirement etc. 

First-time investors: Multi-cap funds can be an ideal choice for first-time investors as they offer diversification and risk management. Someone investing in the stock market for the first time may not be well-versed with the risks and advantages of investing in companies of different sizes. In such a situation, multi-cap funds can be a great option for them as they offer a balanced exposure.

Taxation Rules of Multi Cap Mutual Funds

Returns from multi-cap funds are subject to a capital gains tax. Capital gains tax applies to the gains made from selling your mutual fund units. The quantum of tax on gains depends upon the holding period.

Short-term Capital Gains Tax

If you sell your mutual fund units in less than 12 months, then gains made on them are short-term capital gains. They are taxed at a flat rate of 20%. 

Long-term Capital Gains Tax

If you sell your mutual fund units after 12 months, then gains made on your investment are long-term capital gains. Gains up to ₹1.25 lakhs are exempt from any taxes. For any gains above that, a tax rate of 12.5% applies. 

How to Invest in Multi Cap Funds?

You can use INDmoney to invest in the best multi-cap mutual funds easily by following these steps:

• Open the INDmoney app and log in with your credentials.
• Navigate to the "Mutual Funds" section within the app.
• Use the filter to select "Multi-cap Funds" to view the available options.
• Choose between a lump sum investment or a Systematic Investment Plan (SIP) for regular investments.
• Enter the amount you wish to invest and confirm the transaction.