Here’s All You Need to Know about Multi Cap Funds in India
Let’s say you visit a fast food - outlet but can’t decide what to eat. In such a case, the best option would be Combo meals which offer a burger, fries, Coke and sometimes some delectable sides or desserts thrown in for good measure. In this way, you get a little taste of each item.
There’s something similar at play when investing in multi-cap funds, which invest in all three categories of stocks – large-cap, mid-cap and small-cap – thereby offering investors the opportunity to savour each slice of the stock market.
What are Multi Cap Funds?
A multi-cap fund is an open-ended equity scheme that invests across large-cap, mid-cap and small-cap stocks. In a multi-cap fund, a minimum investment of 75% of the total assets is required in equity and equity-related instruments. Also, these funds are expected to invest at least 25% in each of the large-cap, mid-cap, and small-cap stocks.
How do Multi Cap Funds Work?
Multi-cap funds have the flexibility to invest in stocks of companies across market capitalisations, so long as they maintain the 25% condition mentioned above. However, the distribution of investment in each of the capitalisations depends upon the fund manager’s strategy. Equities are risky, but within them, the quantum of risk varies. Depending upon the broader stock markets, the fund manager can adjust the holdings to maximise returns.
Types of Multi-Cap Funds
Large-cap-focused funds: In these funds, the fund manager assigns more weightage to large cap funds that are likelier to lend more stability to the overall portfolio. This gives the fund manager leeway to invest the rest of the corpus in a mix of mid-cap and small-cap stocks that have the potential to offer good growth opportunities and returns.
Mid-cap/small-cap focused funds: In these funds, the weightage is skewed towards mid-cap and small-cap stocks. Thus, these funds employ a much more aggressive approach since mid-caps and small cap funds, may be riskier than large-cap stocks but have the potential to deliver better returns.
No specific focus: These types of multi-cap funds do not focus on any particular market cap other than investing the minimum required in each of the market caps. The weightage between large-caps, mid-caps and small-caps can vary depending on the fund manager’s strategy, stock valuations and overall market conditions.
Advantages of Investing in Multi-Cap Funds
More diversity: Multi-cap funds cover a broad spectrum of the stock markets, including stocks of companies of all sizes and from various sectors and industries. In that sense, they can be considered a vehicle of diversification where if the small-cap stocks are falling and there is some gain in the large-cap stocks, the portfolio can be hedged from market risks to some extent.
Managing risks: Since these funds offer fund managers the flexibility to alter the weightages given to each of the market caps after the minimum investment, they can change the proportion between each of the three depending upon broader market conditions and individual stock market valuations. In this manner, these funds can manage risks to some extent.
Who should invest in Multi Cap Funds?
Multi cap funds can be an option for those investors wishing to have exposure across market caps to balance risks and returns. It can also be considered by first-time investors seeking diversification across market caps but are overwhelmed to do their own research and by investors with a long-term investment horizon.
Taxation on Multi Cap Funds
Since multi-cap funds are required to invest a minimum of 75% of their total corpus in equity and equity-related instruments, they are classified as equity funds for taxation purposes. Thus, short-term capital gains are taxed at 15%, while long-term capital gains are taxed at 10% after factoring in the exemption of Rs 1 Lakh (p.a).
Because of the large-cap component, multi-cap funds may be less risky than only mid-cap and small-cap funds. Investors should opt for these funds keeping in mind their risk tolerance and overall financial goals.