Multi-Cap Mutual Funds

mutual funds have become one of the most sought-after investment instruments for Indian investors these days. There are different types of mutual funds that are available for every type of risk profile and investment objectives. Within equity mutual funds, there are many different types, including large-cap mutual funds, mid-cap mutual funds, small-cap mutual funds, multip-cap mutual funds, and so on.

In this article, we will be exploring multi-cap mutual funds, how they work, the benefits of investing in multi-cap mutual funds, the factors that should be considered before investing in multi-cap mutual funds, and so on.

Before we learn further about Multi-Cap mutual funds, we need to understand what market capitalization is. Market capitalization refers to the total number of outstanding shares of a company in the market multiplied by the current price of each share. In simpler words, it is referred to the market value of all the shares that are held by the company's shareholders.

Let's understand this better with an example. A company, named XYZ, has 20,000 outstanding shares in the market and each share of the company is priced at ₹20. Then, the market capitalization of XYZ company will be calculated as follows:

Market Capitalization = Outstanding Shares x Price Per Share

Market capitalization = 20,000 x ₹20 = ₹4,00,000

So, the market capitalization of XYZ company is ₹4,00,000.

The stock market is classified into broad categories: Large Cap, Mid-Cap, and Small Cap. In this article, we will take a deep dive into a type of mutual fund called Multi-Cap Mutual Funds.

A multi-cap mutual fund is a type of equity fund that invests in stocks across market capitalization. The Securities and Exchange Board of India (SEBI) has said that 75% of a multi-cap mutual fund's total investment should be in equities and equity-related instruments. This limit is further divided according to market capitalization.

It is recommended that fund houses should allocate a minimum of 25% in each of the market segments: large-cap, mid-cap, and small-cap companies. The allocation is done to safeguard investors' interests in a volatile marketplace.

Depending on the type of fund, SEBI has outlined how each of them should allocate their resources in the respective segment they represent. For example, a large-cap mutual fund can invest only in the top 100 companies based on market value. In the same way, a small-cap mutual fund can invest in companies ranked below 250.

Multi-cap mutual funds can invest in all three market capitalization segments. However, the proportion of stocks or the amount of exposure to a particular segment in a portfolio could differ, depending on the fund manager's decision. For example, mid-cap and small-cap stocks may be a priority when the economy is growing, and large-cap stocks may take precedence during a slowdown.

Based on their larger exposure to a certain segment of the capital market, multi-cap mutual funds can be classified as:

These multi-cap mutual funds focus more on large-cap stocks and they allocate more than 25% to them. These funds offer stability and balance to the portfolio, especially when there is a crash in the market. Firstly, they secure the portfolio via large-cap stocks and later explore the mid-cap and small-cap growth opportunities.

These multi-cap funds have a larger exposure to mid-cap and small-cap stocks to earn higher returns on them. They invest in large-cap stocks to counterbalance any downside risk.

Apart from keeping the mandatory investments of 25% of the assets in each capitalization, these funds do not target any specific segments. The main focus of these funds is to find out stocks that have a good potential to outperform and generate benchmark-beating returns.

There are two investment modes through which an investor can invest in mutual fund schemes. They are

Lumpsum - You choose lump sum if you wish to invest one time in a mutual fund scheme. Usually, people choose this method when they receive a bonus, so they can put the money in a scheme as a one-time investment.

If you wish to know how much and how long you need to invest to achieve your goals, please check the Lumpsum Calculator, created by Koshex.

Systematic Investment Plan (SIP) - You choose SIP when you want to invest a fixed amount in a scheme at regular intervals. You can choose to invest ₹5000 every month or ₹10,000 every quarter. When the due date comes, your amount will be deducted automatically from your bank account and it will be used to purchase units of the mutual fund scheme.

If you wish to know how much you need to invest every month via SIP to achieve your goals, please check the SIP Calculator, created by Koshex.

Equity mutual funds are usually recommended for the long term. You can choose to invest in multi-cap mutual funds for the below reasons:

Multi-cap mutual funds are suitable for those investors with those who have a moderate risk tolerance with an investment horizon of a minimum of 5 years or over 5 years. You can also invest in multi-cap mutual funds if you are looking for comprehensive market coverage through one fund instead of investing in multiple mutual funds.

Beginners, who are having difficulty which particular capital segment to go for, can choose to invest in multi-cap mutual funds. If you wish to create a diversified portfolio to make the best of all capitalization segments, you can invest in multi-cap mutual funds, as they have increased exposure to mid-cap and small-cap stocks. This helps you earn good returns. At the same time, multi-cap mutual funds invest their money in large-cap stocks as well to protect their earnings during tumultuous economic situations.

There are several benefits to investing in multi-cap mutual funds. Here are a few and how they can help you with your investment journey.

The obvious advantage of multi-cap mutual funds is the diversification offered by them. It is the only type of equity mutual fund that invests across market capitalization. Multi-cap fund managers dynamically manage their portfolio mix, depending on market conditions. This makes multi-cap mutual funds ideal for those investors who do not want to follow the market regularly and actively make changes to their mutual fund portfolio regularly.

Since multi-cap mutual funds are diversified efficiently, they offer better returns. For example, if small-cap companies are not performing well during a period, the fund manager can automatically shift focus to other companies such as large-cap companies to manage risk. Hence, the risk-adjusted returns in multi-cap funds are better than in single-cap mutual funds.

Multi-cap mutual funds come with moderate risk. Although they are equity mutual funds, they have moderate risk due to their diversified portfolio. Since the funds are diversified among large-cap, mid-cap, and small-cap mutual funds, the downside risks in volatile markets are limited. Multi-cap mutual funds are less risky than pure mid-cap or small-cap mutual funds. On the other hand, multi-cap mutual funds are slightly riskier than large-cap mutual funds.

For investors, who want to diversify across market capitalization but don't have the knowledge to do so, multi-cap mutual funds are a great option. The hard work of picking the stocks and keeping track of the investments is done by the fund manager. All you have to do is invest in a multi-cap mutual fund and you get access to a diversified portfolio of stocks in their basket.

Generally, small-cap mutual funds are open-ended mutual funds. So, you can withdraw your money any time you want. One thing you need to remember is that you might have to pay an exit fee if you make withdrawals one year from the investment date.

Mutual fund schemes are managed by fund managers. On top of that, Asset Management Companies (AMCs) recruit the finest finance professionals to develop research teams. Small-cap mutual funds allow you to get the expertise of these professionals free of cost.

You can start an SIP in a small-cap mutual fund for as low as ₹100 or ₹5000 for lump sum investments. You can start small and increase your investment later.

Let’s say you have decided to invest in small-cap mutual funds because they suit your risk appetite and investment objectives. Here are some things you should consider before investing in small-cap mutual funds.

Investment Horizon - Always consider your investment horizon before deciding to invest in multi-cap mutual funds, as they are best suited for long-term investments. The ideal investment horizon for multi-cap mutual funds is 5 years or more than 5 years.

Investment Risk - When you invest in multi-cap mutual funds, your money is invested in the stock markets. So, you are exposed to market risks when you are investing in these funds. In the short to medium term, markets can be volatile and you need to consider the risks before investing in these funds.

Fund Manager's Performance - The experience and expertise of a fund manager can benefit investors who invest in multi-cap mutual funds. With multi-cap mutual funds, fund managers need to actively seek opportunities to diversify the portfolio to reduce risk and align with investment goals. In order to receive all the benefits, investors must analyze the past performance of the fund manager.

Investors must understand the costs involved in investing in mid-cap mutual funds. The expense ratio is the amount charged by fund houses for managing the fund. SEBI has marked the upper limit for this at 2.25% of the average asset under management. If a fund has a lower expense ratio, you will earn higher returns. So, it is important to choose a fund that has the lowest expense ratio.

Liquidity - Even though you can withdraw your investments from multi-cap mutual funds anytime you want, it is a good idea to stay invested in them for a long period. Multi-cap mutual funds only offer higher returns if you stay invested for the long term. Hence, if you have any short-term goals, it is important to invest in debt mutual funds, rather than investing in equity mutual funds.

Small-cap mutual funds are subject to capital gains tax and dividend tax.

When you redeem your investments from small-cap mutual funds, you will have to pay tax on capital gains. The amount of tax you need to pay depends on the holding period, which is the period for which you stayed invested in a mutual fund scheme. Below are the capital gains tax based on the holding period.

Short-Term Capital Gain (STCG) Tax

If you withdraw your investments from small-cap mutual funds within one year, you will be taxed 15% under the Short-Term Capital Gain (STCG) tax slab.

Long-Term Capital Gain (LTCG) Tax

Long-Term Capital Gain (LTCG) tax will be applicable for those who hold the investment for over one year. For example, gains up to ₹1 lakh in a financial year are tax-free but beyond that number, the gains are taxed at 10%.

All dividends received on or after April 1, 2020, will be taxable in the hands of the investors as the DDT (Dividend Distribution Tax) on dividends was withdrawn. Also, the Finance Act, of 2020, imposes a TDS (Tax Deducted At Source) on dividend distribution by mutual funds on or after April 1, 2020. The standard rate of TDS is 10% on dividend income paid more than ₹5,000 from a company or mutual fund.

Multi-cap mutual funds are a good investment option if you have a moderate risk appetite and a long-term investment horizon. They are also a wonderful investment option for newbies who don’t want to invest in multiple mutual funds but would like to get exposure to funds across various market capitalizations. Also, choose multi-cap mutual funds only if you have a long investment horizon and wouldn’t require your money immediately.

We hope this article helped you understand all about multi-cap mutual funds and how they can help you achieve your goals. It is important to learn how multi-cap mutual funds will benefit you and what factors you should consider before investing in them.

If you wish to learn more about other types of mutual funds, including ELSS funds, and other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.

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