Understanding multi-cap funds: A quick guide to diversified investing

Discover the world of multi-cap funds – from understanding their meaning and exploring different types to assessing risks, potential returns, and optimal investment timing.
EXPLORE FUNDS
4 mins
05 December 2023

Multi-Cap Funds have emerged as versatile and strategic investment options. These funds provide investors with the flexibility to navigate across different market capitalisations, offering exposure to a diverse range of stocks. Understanding multi-ap funds is paramount for investors seeking a balanced and diversified portfolio. This article delves into the intricacies of multi-cap funds, exploring their features, benefits, and considerations to empower investors with the knowledge needed to make informed financial decisions.

What are Multi-Cap Funds?

Multi-Cap Funds are a category of mutual fund that invest across various market capitalisations, including large-cap, mid-cap, and small-cap stocks. This diverse approach allows fund managers to adapt to changing market conditions, allocating assets strategically based on prevailing opportunities. By providing a well-rounded portfolio, multi-cap funds aim to balance risk and returns, making them suitable for investors with varying risk appetites and investment horizons. This flexibility enables investors to capitalise on market trends and benefit from a dynamic investment strategy that adapts to the evolving economic landscape.

Types of multi-cap funds

Multi-cap funds can be classified into three types based on their investment strategy:

  1. Large-cap focused multi-cap funds: These funds allocate more than 25% of their assets to large-cap equities. They are useful for adding stability and balance to a portfolio, especially when markets are falling.
  2. Mid-cap focused multi-cap funds: With a more aggressive strategy and 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.

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When to invest in multi-cap funds

Multi-cap mutual funds are ideal for investors who want to diversify their portfolio across different market capitalisations and sectors. It is ideal to have a long-term investment horizon of 5+ years if one wishes to invest in multi-cap funds.

Risks associated with multi-cap 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. However, since these schemes also invest in mid-cap and small-cap stocks, they are riskier than large-cap schemes that invest mostly in large companies.

Factors to consider before investing in a multi-cap fund

Before investing in a multi-cap fund, consider the following factors:

  • Fund manager’s performance: The fund manager plays a crucial role in the performance of multi-cap mutual funds. Look for a fund manager with a proven track record of managing multi-cap funds.
  • Portfolio: Check if the fund is too concentrated in a few stocks or sectors. A well-diversified portfolio can help reduce risk.
  • Tax implications: Multi-cap mutual funds attract two types of taxes:
  • Capital gains tax: If you sell your units before one year from the date of purchase, short-term capital gains tax will apply at 15%. If you sell your units after one year from the date of purchase, long-term capital gains tax will apply at 10% (without indexation) . Cess and surcharge as applicable shall be levied on the tax amount.

Conclusion

In conclusion, multi-cap mutual funds offer investors an opportunity to diversify their portfolio while taking the advantage of changing market conditions to get better returns on their money. However, before investing, it is important to consider the various risks and benefits associated with these funds, and thus make an informed choice.

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Frequently asked questions

Are multi-cap funds the same as Flexi-cap funds?

Multi-cap funds and Flexi-cap funds are similar but not identical; while both invest across market capitalizations, Flexi-cap funds have more flexibility in adjusting their portfolio allocations.

Should novice investors invest in multi-cap funds?

Novice investors may consider multi-cap funds as they provide diversification across different market segments, offering exposure to large-cap, mid-cap as well as small-cap stocks, allowing for a balanced investment approach.

Why not invest in one capitalisation rather than multi-cap funds?

Investing in one capitalisation may expose investors to higher risks, as concentration in a single market segment lacks diversification. Multi-cap funds mitigate this risk by spreading investments across various market caps.

Is it safe to Invest in a Multi-cap Fund?

Investing in a multi-cap fund can be relatively safe, provided investors carefully choose funds with a consistent track record, reputable fund managers, and align with their risk tolerance and financial goals.

What is the minimum amount to invest in Multi-cap Funds?

The minimum amount to invest in multi-cap funds varies across fund houses but is generally affordable, starting for as low as Rs. 100, making it accessible for a broad range of investors.

Can we redeem Multi-cap Funds anytime?

Yes, multi-cap funds offer the flexibility to redeem investments at any time, providing liquidity to investors who may need to access their funds based on changing financial needs.

Is there any tax on Multi-cap Funds?

Certainly, capital gains taxes are applicable to profits generated from Multi-cap Funds based on the investment horizon. For investments held for less than one-year, short-term capital gains taxes of 15% on the gain are levied. Conversely, investments exceeding one year attract long-term capital gains taxes at a rate of 10% on gains exceeding Rs. 1 lakh annually.

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Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

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(i) provide investment advisory services in any manner or form;

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(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


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