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Multi-Cap Funds: Definition, Features, and Benefits

There are some mutual funds that allow you to focus your investment in equity stocks belonging to a specific market capitalization such as large-cap, mid-cap, and small-cap mutual funds. But what if you
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Written by

Abhishek Chakravarti
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Abhishek Chakravarti

BFSI Writer

Abhishek is a financial writer with over 6 years of experience in the BFSI sector. Prior to his current stint with Axis Max Life Insurance, he has worked with leading fintech startups. He specializes in writing about taxation and various investment products like ULIPs, retirement plans, guaranteed investment plans, mutual funds etc.

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Reviewed by

Sahil Rawal
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Sahil Rawal

BFSI Expert

Sahil Rawal is a digital & brand management specialist with over 10 years of experience in Financial Services Industry. Life insurance professional with expertise in digital marketing strategy, website content marketing and brand communication designed to increase brand awareness, drive engagement & sales.

What are Multi Cap Funds?

Multi-cap funds can be defined as a type of equity mutual fund that invest in companies across all 3 market capitalisations. As per current SEBI rules, multi-cap funds need to invest at least 75% of their assets in equities and equity-oriented investments. Another key requirement is that a multi-cap fund needs to maintain at least 25% individual portfolio exposure towards large-cap, mid-cap and small-cap stocks respectively. Additionally, these equity investments are sector-agnostic i.e. fund managers can pick stocks of appropriate market cap from any industry or sector at their discretion.

As a result of this unique mandate these mutual funds can help diversify investments across large, small, and mid-cap companies without having to focus on a specific sector. So, By investing in multi-cap funds, you can introduce asset allocation into your investment portfolio without any of the hassles associated with choosing and tracking multiple mutual fund schemes.

How do Multi Cap Funds Work?

As per current rules,Large-cap funds have to invest a major portion of their assets in the top 100 listed companies based on their market cap. Similarly, stocks ranked between 101st and 250th on the basis of market cap are the primary investment of mid-cap funds. While small-cap funds invest primarily in companies that rank 251th or lower.

Unlike these funds, multi-cap funds must invest in stocks belonging to all these market capitalisations in equal proportion of 25% each. The fund manager can however choose these investments irrespective of the sector or industry that the specific stock belongs to.

So, the equity portfolio of a multi-cap fund will look something like this:

Type Investment Allocation in Portfolio
Large cap stocks 25% (Minimum)
Mid-cap stocks 25% (Minimum)
Small-cap stocks 25% (Minimum)
Any other investments like equities/equity-
derivatives/bonds/other debt or money
market instruments, etc. 		25%

Now that you know the basic definition of multi-cap equity funds, let's take a look at some other important information about multi-cap funds.

Key Features of Multi Cap Funds

The following points highlight some key features of multi-cap funds that investors should be aware of:

⦁ Portfolio diversification

One of the main features that make multi-cap funds attractive is that they have a diversified portfolio. These mutual funds invest in equity stocks of companies across all market capitalisations irrespective of the industry or sector these companies belong to. So this type of investment can diversify your portfolio in order to minimize overall risk and optimize returns.

When you invest in a multi-cap mutual fund, the fund manager will distribute your investments among large, mid, and small-cap stocks. By doing so, this fund will not only focus on higher return potential but also provide some degree of downside protection through diversification of the investment portfolio.

⦁ Flexibility

The fund manager of a multi-cap fund enjoys greater flexibility in making decisions to buy or sell stocks. As experienced professionals, they study market movements and can predict the chances for a slowdown or upward movement of the economy.

Based on this study, they can invest, withdraw, or re-invest their investment amount in stocks of large, mid, and small-cap companies as long as they have at least 25% portfolio allocation towards each type of stock. This makes them an excellent option for long-term goals like buying a house, paying for children’s higher education or planning for retirement .
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Benefits of Investing in Multi-Cap Funds

The points below highlight the benefits of investing in multi-cap mutual funds:

⦁ Better Diversification and Asset Allocation

Multi-cap funds can regulate your exposure to risk by avoiding high degree of asset allocation towards potentially risky midcap and small-cap stocks. Based on their analysis, fund managers can swiftly switch between stocks of different industries and sectors. This can reduce your overall investment risk while providing optimal returns.

⦁ Convenient for beginners

Choosing a mutual fund scheme that brings in returns which align with your investment goals can be tricky. If you are a new investor, knowing which mutual fund is right for your risk profile can be a tough decision. A multi-cap fund can help solve this confusion as it distributes your investments almost equally in large, mid, and small-cap stocks.

⦁ Exposure to all key sectors of the economy

These funds are not restricted to any particular sector or theme. As a result, you can potentially get investment exposure to any and all major sectors and companies. This can help grow your wealth irrespective of slowdown that might occur in any specific theme or sector.

Taxation of Multi Cap Funds

Taxation of multi-cap funds can be divided into 2 categories – tax on capital gains and taxation of dividends. The tax on mutual funds belonging to this category is as follows:

1. Capital gains tax

This is the profit that you earn on selling units of this scheme. The capital gain tax rate varies among investors depending on their holding period.

  •  Short-term capital gain: When the holding period prior to redemption is less than 12 months, the STCG tax rate will be 15%.
  •  Long-term capital gains: If you hold units of a multi-cap mutual fund for a year or more, you earn long-term capital gains. For a limit of Rs. 1 lakh in LTCG, there is no tax applicable. However, if long term capital gains from equities is more than Rs.1 lakh in a financial year, the tax rate is 10% on the incremental amount with no indexation benefit .

2. Dividend Taxation

Dividends are taxable at the hands of investors. In other words, dividends earned by investors from multi-cap funds are added to their yearly taxable income under the head “Income From Other Sources ”. This is then taxed as per their applicable income tax slab for the fiscal year.

Things to Consider Before Investing in Multi Cap Funds

Now that you know about the features, benefits, and limitations of multi-cap funds, here are a few important points you must keep in mind:

⦁ Expense ratio

You must be well aware of the expense ratio of a multi-cap fund before investing in it. These charges might vary among AMC (Asset Management Company) and cover the funds' administrative and operation charges. Opting for a firm with a higher expense ratio can cut down your final earnings from the returns.

⦁ Risks

While planning to invest in multi-cap funds, you must also be aware of your risk tolerance. These funds are more volatile than large-cap funds which can cause stress if you have a poor risk appetite. This means that the Net Asset Value of mutual funds belonging to this segment are liable to undergo significant fluctuations in the short-term

⦁ Investment goals

As an investor, you must be aware of your financial goals before investing. This includes having a clear idea of whether you want long-term or short-term gains and investing accordingly. If you are planning to make the most out of your multi-cap fund investment, you must consider keeping a minimum investment horizon of five years.

FAQs About Multi-Cap Funds

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What are key risks of investing in multi-cap funds?

What are the tax benefits of multicap funds?

Can I make lumpsum investments in multicap funds?

What is the difference between multi-cap and flexi-cap funds?

Can multicap funds invest in debt instruments?

ARN: Dec23/Bg/18J

Sources:

www.outlookindia.com/business/what-is-a-multi-cap-fund-pros-and-cons-and-who-should-invest--news-222087

www.utimf.com/articles/what-are-multi-cap-funds

www.paytmmoney.com/blog/benefits-investing-multi-cap-funds/

paytm.com/blog/mutual-funds/what-are-multi-cap-funds-a-complete-guideline/

www.etmoney.com/learn/mutual-funds/multicap-mutual-fund/

groww.in/p/equity-funds/multi-cap-mutual-funds

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