Lately, mutual funds have become a popular investment choice for many investors. Mutual funds may seem like a simple investment product that lets indirect investment in the stock market. Investors invest in a common pool which is then invested by the fund manager in a diversified portfolio. However, realizing the growing interest in mutual funds the fund companies now have designed different mutual fund products to cater to the specific investment needs of their clients. Multi cap mutual funds are increasingly becoming a common choice for investors.
Mutual funds usually invest in companies based on their market capitalisation. Hence, we have large-cap, mid-cap, and small-cap mutual funds. Multi-cap funds are a new category that invests in all – large-cap, mid-cap, and small-cap companies. So, what is multi cap funds?
We will explore what is multi cap mutual funds and look at the various factors that you should know before investing.
Let’s begin by understanding the basics: what is a multi-cap fund?
Investment experts often recommend that investors should invest depending on their risk appetite. However, it is not easy to measure one’s risk tolerance level as high, low, or medium. Multi-cap funds have helped solve the problem. As the name suggests, multi-cap funds invest in all businesses of all sizes and sectors. The fund manager has the flexibility to allocate the fund between big, mid, or small-size companies and adjust portfolio composition according to the changing market conditions.
The fund managers of large, mid, or small-cap funds are restricted by the definition of the fund, meaning a large-cap fund manager can’t invest in small-cap companies even if the market conditions are lucrative. Mid-cap funds allow fund managers to leverage investment opportunities across companies.
Features of multi-cap fund
The salient features of multi-cap funds stand below.
Diverse investment portfolio
Multi-cap funds are equity funds and require investing at least 65% of the total corpus in company stocks. However, mid-cap fund managers can invest in any industry or company size depending on market conditions.
Fund managers of multi-cap funds can do a better job in managing risk by allocating funds across the market spectrum depending on market conditions. If you have medium risk tolerance these funds are good investments for you.
Fund managers have the freedom to reallocate the fund across industries and businesses according to market conditions. Since they are not restricted by the fund’s definition, they can identify growth opportunities and invest for the best returns.
Fund manager’s expertise
These are actively managed where the fund manager’s expertise and ability to identify the best investment opportunities are critical for the fund’s performance. Analyzing the past performance of the stock and investments made by the manager will help you gauge the efficiency of the fund.
Who should invest in multi-cap funds?
After learning about multi cap funds meaning, let’s consider the investor profile suitable for investing in these funds.
First-time investors can invest in multi-cap funds without much forethought. It will offer them instant diversification. Also, most of these investors aren’t aware of the risks of investing in companies of a specific size. In such cases, multi-cap funds work best for them.
Investors in dilemma
It is best to go with a multi-cap fund when you are confused whether you will get better returns by investing in large small companies. These funds provide both stability and growth by investing in diverse companies.
Investors with a long-term investment horizon
Multi-cap funds are equity funds that offer better returns in the long run. If you are an investor investing for a longer horizon to build wealth for retirement, children’s education etc., multi-cap funds can help achieve your financial goals.
Investors who want to invest in small-cap without the risk
Small-cap companies have better growth opportunities than large and mid-cap companies but are also highly risky. Some investors don’t want to miss the growth opportunities offered by small-cap companies without associated risks. Multi cap mutual funds are the ideal choice for them.
Things to consider
Before investing, investors must pay attention to the following.
Since multi-caps are equity investments, you should invest with a long-term investment goal. Large-cap and multi-cap funds have generated the same returns over a period of seven years.
Portfolio concentration equals the risk exposure of your investment. For example, if the fund manager is bullish on the IT sector and invests in large, mid, and small companies, your portfolio will carry more risks due to over-exposure in the IT companies. It can directly impact portfolio performance.
Equity investment always carries risks. As an investor, you should invest according to your risk appetite. Investors in the stock market must understand that the market will remain more volatile during short and medium terms.
The expense ratio is the cost that investors must bear while investing in mutual funds. It is a fee that mutual fund companies charge for offering investment services. Since expense ratios can vary, one must cut clear on the expenses and research before investing.
When you redeem the units of your mutual fund investment and earn profit, a capital gain tax is levied on your capital gain. In addition, any dividend earned is also subject to Dividend Distribution Tax (DTT).
Dividend Distribution Tax (DDT)
Fund management companies will deduct a 10% tax before issuing the dividend to investors.
Capital Gain Tax
Capital gain is calculated depending on the tenure of your investment.
Short-term capital gain tax:
If you sell your units within one year, a 15% short-term capital gain tax is imposed.
Long-term capital gain tax:
When your investment tenure is more than one year, a long-term capital gain is calculated on the profit earned. Income from the investment up to ₹1 lakh is tax-free in a financial year; above the threshold the tax rate is 10%.
Benefits of investing in multi-cap funds
Advantages of portfolio diversification
These funds invest in different companies and sectors to offer diversified portfolio investments.
Better risk-adjusted returns
Multi-cap funds offer better-adjusted returns as compared to small-cap funds. In the long run, the returns generated by these funds are equivalent to mid-cap funds. The fund manager tweaks the fund’s allocation to offer better risk-adjusted returns under different market conditions.
Fund managers are critical for the performance of these funds – you benefit from their expertise and investment judgment. They will adjust and allocate your fund according to changing market trends without your worrying.
While investing, never put all your money in a single basket. Multi-cap funds allow instant diversification and risk mitigation. Take time to evaluate the funds available in the market to select the best multi cap fund according to your risk profile.