Multi-cap Mutual Funds

As per SEBI guidelines, there are restrictions on small, mid or large-cap funds. When you invest in top equity funds like multi-cap schemes, your corpus is allocated across stocks in varying proportions.

Multi-cap funds work by investing 75% of the fund’s corpus in equity-linked instruments and equity. The remaining 25% is invested in mid, large and small-cap stocks. Hence, you stand a better chance to earn potential returns because multi-cap funds are exposed to large-cap stocks for excellent stability. 

Similarly, mid and small-cap stocks increase the growth potential of your funds. Tapping the growth opportunities of the medium and small-sized companies in the market can generate considerable returns for your funds. 

Then, when the market conditions tend to deteriorate, large-cap stocks can come in handy to take shelter. This way, fund managers ensure to decrease or increase company holdings by minimal margins depending on how the market behaves. However, they need to ensure that 25% of funds are allocated in the respective market capitalisation segment.

There are 3 broad categorisations of multi-cap equity based mutual funds. The first category is those funds primarily focusing on large-cap stocks. As the name implies, these funds concentrate on large-cap segments before exploring mid or small-cap companies.

The second type of these diversified equity mutual funds focuses on small or mid-cap companies. These equity mutual funds explore investment opportunities in mid or small-cap segments and concentrate on large-cap companies only when the market looks bearish.

The third type of equity mutual fund scheme does not concentrate on specific market capitalisation. Instead, these funds scour the market looking for investment opportunities across market segments. Simply put, these funds focus primarily on outperforming stocks.

A few essential features of investing in multi-cap funds include the following:

• Flexibility

• Potential returns

• Diversification factor

   

The diversification element is one of the significant features of multi-cap funds. These are the only variants of equity mutual funds that invest across market capitalisation. As an investor, apart from maximising returns, you may want to reduce potential risks as well.

You can easily achieve that with the help of a multi-cap fund, as its diversified portfolio helps mitigate the risk factor. Another feature of a multi-cap fund is the flexibility of investment across market capitalisation. 

This simply means fund managers may invest in large-cap funds to minimise loss when the market is not performing well. In addition, when you invest in multi-cap funds, you have higher chances of generating better returns as the portfolio is diverse.

However, this again depends on the expertise and skill of your fund manager, who can help you generate maximum returns. So, check out the performance of top equity mutual funds in India daily before selecting a fund.

Here are a few advantages of investing in multi-cap funds:

• Less risky due to a diversified portfolio

• Provides good exposure across various industry sectors irrespective of the market cap

• Offers the flexibility to change the composition of the portfolio, depending on the market stability

• Perfect investment choice if you are looking for an investment horizon of more than 5 years

• Better exposure across all prominent sectors of the economy

• Avoids the need to buy individual company stocks for a complete market coverage

Taxation is a crucial factor you need to consider when investing in mutual funds. While there are no tax benefits in this type of equity mutual fund, you are liable to pay tax on the capital gains you get when redeeming your units.

If you sell your units within a year, you are entitled to pay Short Term Capital Gains (STCG) Tax of 15% on gains. On the contrary, if you redeem your multi-cap fund units after a year, you must pay Long Term Capital Gains Tax (LTCG).

However, you need to pay this tax only if your Long-Term Capital Gains exceed ₹1 Lakh. For gains less than the prescribed amount, there is no tax levied. The tax rate is 10% for Long Term Capital Gains without indexation.

Multi-cap funds can be risky if your fund managers rely on small and mid-cap stocks to boost potential returns. This is so because these market segments are riskier when compared to large-cap sectors.

With the fund manager concentrating primarily on mid and small-cap segments to boost the portfolio earnings, multi-cap funds carry a higher risk. 

Furthermore, if the fund manager discovers market conditions to be relatively low, your funds may be shifted from mid or small-cap to large-cap companies. Simply put, there is a higher risk of volatility when investing in multi-cap equity mutual funds. 

Finding the best equity mutual funds or multi-cap funds for your profile is easiest when you opt to invest with professional assistance. Here, choosing the right AMC or investing platform is key. 

On Bajaj Markets, you can invest online and the entire process is completely digital. All you have to do is visit the official website, sign up for the service by sharing your phone number, and you can start investing.