Multi Cap Funds |Types, Factors and Risks

What are Multi Cap Funds?

Multi-cap funds are equity mutual funds that do not focus on a specific company’s capitalisation but are exposed to all sectors and companies with different capitalisations. This diversifies them and gives a balanced exposure to company stocks of all sizes. It also minimises the need for investors to invest across multiple funds with different capitalisations by allocating the corpus of a single fund between big, medium, and small-capitalisation equities.

Mutual funds must be specialised in their investing technique in order to comply with rules. A large-cap fund can only invest in the equities of the top 100 publicly traded companies in terms of market capitalisation. Similarly, small-cap funds can invest in firms listed below 250, and so on.

However, multi-cap is the only category that has a regulatory structure defining the size and industry of firms in which it can invest. As a result, these funds invest in equities with large, mid, and small capitalisations. The percentage of these stocks could possibly differ. It is determined by the fund management. They analyse market circumstances and alter the percentage of large-cap, mid-cap, and small-cap stocks in a multi-cap mutual fund’s portfolio appropriately.

Types of Multi-Cap Funds

Multi-cap funds can prove to be terrific wealth creators in the long term since they can take advantage of investing opportunities throughout the market. They can be categorised as :

1. Large-cap Focussed Multi-cap Funds: Such multi-cap funds allocate more than 25% of their assets to large-cap equities. These funds are useful for adding stability and balance to a portfolio, especially when markets are falling. They begin by securing the portfolio with large-cap equities and then move on to mid-cap and small-cap growth opportunities.

2. Mid-Cap Focussed Multi-cap Funds: With a more aggressive strategy and with larger exposure to mid-cap and small-cap equities, these multi-cap funds aim to generate strong returns.

3. No Specific Focus Multi-cap Funds: Apart from the mandated 25% investment in each capitalisation, these multi-cap funds do not target any specific categories. Fund managers concentrate on firms that have the potential to outperform and invest in shares across all sectors.

Factors to Consider Before Investing in a Multi Cap Fund

1. Fund Manager Performance : A multi-cap fund invests in the stock and equity-related securities of firms that have different market capitalizations. Furthermore, the fund management is always searching for ways to diversify the investment in order to meet the scheme’s objectives. The success of such schemes is therefore greatly dependent on the fund management. Before investing, you should look at the fund manager’s previous performance across multiple schemes. You should also consider how he managed the multi-cap fund during times of market ups and downs.

2. Portfolio Concentration: As an investor, you should consider the fund’s portfolio concentration to guarantee diversification. For example, if the fund manager is positive on the IT sector and invests a bigger share of the corpus in small, mid, and large-cap stocks of firms in that area, your portfolio may be over-exposed to that industry.

3. High Expense Ratio: The Asset Management Company (AMC) charges a fee known as the expense ratio to operate a multi cap fund. To maximise profits from market opportunities, multicap funds require active management. These funds have a higher expense ratio than traditional large-cap or small-cap funds. However, the profits earned by these funds can more to offset the expenditures and charges.

4. Taxation: Another factor that investors must consider is taxation. When investors redeem multicap fund units, they must pay capital gains tax on the capital gains made. Investors must pay a 15% tax if they sell units of multicap funds in less than a year. These gains will be subject to the Short Term Capital Gains Tax (STCG tax).

If investors keep multicap fund units for more than a year, their gains will be subject to Long Term Capital gains Tax (LTCG tax). Gains of up to one lakh rupees are exempt from taxation. The tax rate is 10% without indexation for amounts exceeding one lakh.

5. Risk: When investing in a multi-cap fund, keep in mind that you are placing your money in the stock market. As a result, they are vulnerable to the risks associated with stock market conditions. However, in the case of multi-cap funds, particularly owing to the diversified portfolio, investors may invest with less risk compared to pure mid-cap or small-cap funds.

When should you invest in a Multi Cap Equity Fund?

When your investment goal is long-term wealth growth and you have a moderate risk tolerance, you should consider investing in Multi-Cap Mutual Funds. These schemes provide a diverse approach to stock market investing and strive to make best of every investment opportunity. Investors who are willing to take moderate risks and do not have the time to examine a specific fund in the market might consider investing in multi-cap schemes for long-term wealth growth because these funds have the potential to outperform large-cap funds, but offer lower returns when compared to mid- and small-cap funds.

As a result, if you invest in a multi-cap fund, you will have exposure to firms of all sizes and will be accurately diversified while being straightforward.

Risks associated with Multi Cap Mutual Funds

Multi-cap funds are considered to have a moderate risk-return profile. When markets are rising, they can outperform large and mid-cap funds. They also collect good gains from small-cap equities during market surges. When markets are down, however, large-cap funds can offer the cushioning needed to prevent returns from being eroded and severely damaged. They are less volatile than mid-cap funds in the long term, but riskier than large-cap funds. Fund managers can also deploy additional fund resources to a certain capitalisation depending on market movements.

However, they have 50% exposure to mid-cap and small-cap equities at any particular time, these funds are exposed to enough volatility. Even if fund managers can change asset allocation when there is a long bad market, it cannot be reduced below 25% in any section of capitalisations.

Tax Implications on Multi Cap Mutual Funds

When you redeem your Multi Cap Fund units, you must pay Capital Gains Tax on the capital gains you made. In addition, any dividends you earn are subject to Dividend Distribution Tax, or DDT.

1. Dividend Distribution Tax (DDT)

Multi-cap funds are classified as equity-oriented funds under tax regulations if they invest at least 65% of their net assets in equities and equity-related securities. While dividend income from such schemes is taxed at the standard tax rates applicable to investors, it is additionally subject to 10% TDS (Tax Deduction at Source) if the dividend income from mutual funds reaches ₹5,000.

2. Capital Gains Tax

A. Short Term Capital Gain Tax (STCG) : If you sell your investments within one year, the profits are categorised as Short-Term Capital profits (STCG) and must be taxed at 15%.

B. Long Term Capital Gain Tax (LTCG) : Whereas every multi-cap investment held for more than a year is taxed as a Term Capital Gain (LTCG). Gains up to one lakh rupees are tax-free in a fiscal year. Gains over one lakh rupees are subject to a 10% tax.