What is a Multi Cap Fund in India?

Multicap fund means they invest in multiple market caps. By investing in stocks of various sizes of companies and industries, multi-cap mutual funds provide investors with a diverse approach to asset management. This adaptability may enable them to capitalise on opportunities and adjust to changing market conditions.

Diversification

Diversification is spreading investments among various market caps and asset classes. . This is a well-rounded method and enables a diverse portfolio, which potentially reduces risk. The justification for this risk reduction stems from the fact that various sectors or areas of the market may demonstrate varying degrees of performance at any one time. Multi cap funds efficiently manage and limit risk by spreading assets across these varied categories. 

Investing in a multicap fund can be a prudent choice for portfolio diversification, as it provides exposure to a wide range of companies, thereby spreading risk across different sectors and market capitalisations. Consequently, multi-cap fund returns may be favourable for investors seeking long-term capital appreciation may consider a multicap fund, which focuses on investing in companies with growth potential across various market capitalisations.

Varying Market Conditions

Multicap mutual funds may potentially be resilient in diverse market conditions, as they can harness the growth potential of smaller companies and the stability of larger ones, providing investors with a balanced and adaptable investment portfolio.

This implies that multi-cap equity funds may potentially navigate multiple market cycles, from bullish trends to bearish downturns, making them suitable for investors looking for a well-rounded investing strategy that can withstand shifting economic circumstances. However, the efficacy of multi-cap funds is dependent on multiple factors. Investors should carefully examine their financial goals and risk tolerance when considering these funds as a portfolio alternative. Investors looking for a passive and diversified approach to the market may consider a multicap index fund, which tracks a broad index of companies across various market capitalisations.

Possibility of Risk Adjustment

Multicap funds in India have gained popularity due to their unique adaptability in investing across companies of different sizes and sectors. One major benefit of multicap funds in India is their flexibility in risk management, which allows them to invest in companies of various market capitalisations, from large-cap to mid-cap and small-cap. The Securities and Exchange Board of India (SEBI) regulates multi-cap funds in India. It allows the fund manager to modify their allocation in response to current market conditions. This flexibility enables them to potentially maximize returns and reduce possible losses, improving the fund’s total risk-adjusted performance.

Now that we know what is a multi-cap fund, let’s understand the potential disadvantages of these funds. Investors considering multi-cap equity funds should be aware that while this funds] offers diverse opportunities, it  can also carry a higher level of risk due to its  inclusion of mid-cap and small-cap stocks in the portfolio.

Risks

Because they cover a wider range of stocks—including mid-cap and small-cap stocks, multi-cap funds provide a more complex risk-reward dynamic. Consequently, they often entail a greater level of risk, especially when contrasted with funds that are mostly allocated to more well-established businesses.

Overseeing a multi-cap fund can deliberately enhance the allocation to mid- and small-cap companies  during economic upswings to take advantage of their potential for growth and improved earnings prospects. On the other hand, the fund may opt for more stable businesses in preparation of prolonged market downturns. This would act as a buffer during difficult market conditions. As a result, the fund category may see some volatility due to this dynamic strategy.

Multi-cap funds, despite their volatility potential, provide a potentially appealing risk-return mix that protects investors from large market downturns while simultaneously providing opportunities for gain during favourable market phases. Because of this, they may be a desirable option for investors with a five-year minimum investment horizon and a modest taste for risk.

Learn more about the types of investment risk.

Taxation

Investors in multi-cap equity funds should note that their tax liability varies depending on the holding period. Depending on the length of the holding period, the potential returns  on investments in multi-cap funds are classified as either long-term capital gains (LTCG) or short-term capital gains (STCG). The multi-cap funds are classified as STCG and are subject to a 15% tax rate if they are sold within a year. On the other hand, the Multi-Cap investment becomes eligible for LTCG if it is held for more than a year. Returns earned under Rs 1 lakh are not subject to taxation under the LTCG; returns  beyond this amount are subject to 10% taxation. Tax treatment emphasizes how crucial it is to comprehend the tax ramifications of different kinds of equity funds, assisting investors in making well-informed selections that complement their tax plans and financial objectives.

Now that you know what a multi-cap fund is, let us delve into whether a  multicap mutual fund may be the right choice for you!

Investing in equity funds is a big decision that affects your financial well-being in a lot of ways, so you should think it through thoroughly. Your investing horizon, your risk tolerance, and your financial objectives are three essential components that need your consideration. 

Suitable for Extended Investment Term

Multi-cap stocks present a tempting investment opportunity for long-term investors, mainly due to their notable volatility. When the time horizon for keeping these investments stretches out over a lengthy period, the prospect of earning potential returns from large, mid and small-cap companies becomes increasingly encouraging. Multi cap funds allow the investor to potentially benefit from the growth potential of small and mid-cap companies. It’s critical to understand that mid and small cap firms are frequently experiencing growth, and some of them have the potential to develop into tomorrow’s large-cap funds. As a result, investors need to have a more patient and long-term investing horizon of eight to ten years to potentially profit from the growth potential inherent in mid-cap equities. An SIP (Systematic Investment Plan) in a multi-cap fund may be a suitable choice for building long-term wealth as it gives you the freedom to invest in a diverse portfolio of businesses with a range of market capitalisations that suit your risk tolerance and financial objectives.

Risk

The level of risk associated with diverse equity plans varies. Prior to starting any investing endeavour, it is critical to have a clear idea of your risk tolerance. Whether or not multi-cap funds fit with your investing goals is largely dependent on how you evaluate your own risk tolerance. Multi cap funds are associated with a high level of risk, and may consequently, not be suitable for investors with a low-risk appetite. 

Goals

For long-term wealth accumulation objectives, such as retirement planning or gradually assembling a sizable investment portfolio, equity funds may be a good fit.

For goals such as education and major expenses, equity funds may be a good option to attain growth and exceed inflation for long-term objectives like paying for a child’s education or purchasing a home in the future.

Although dividend-focused equity funds or dividend yield funds may be more appropriate for investors looking for consistent income in addition to possible capital growth, equity funds are not often linked with income generating.

Now that we understand what is a multi-cap fund and its advantages and disadvantages, let’s compare multi-cap and flexi cap funds. For both, multi-cap and flexi cap certain rules control how assets are distributed. However, there are some key differences. As their name suggests, multi-cap mutual funds seek to build a well-diversified portfolio of large , mid-cap, and small-cap firms, among other companies with a range of market capitalisations. On the other hand, fund managers have more freedom with an open-ended, dynamically managed equity fund  known as a flexi-cap fund. It makes investments in companies of various sizes, offering chances in the Large, mid-size, and small-cap categories. This is a major difference between multi-cap and flexi cap funds.

Read more about the difference between flexi cap funds vs multi cap funds.

• Multi Cap Mutual Funds set themselves apart by embracing a comprehensive approach to investing, spanning large, mid-sized, and small cap companies. Multicap fund means that they offer a diversified investment strategy, allowing portfolio managers to strategically allocate assets to companies with diverse market capitalisations.
• The Securities and Exchange Board of India (SEBI) establishes rules for all types of mutual funds, and funds are required to invest in equities that align with their designated portfolio.
• Diversification: Multi-cap funds provide diversification by investing in firms of various sizes and industries, reducing portfolio risk and enhancing stability.
• Adaptability to Varying Market Conditions: Multi-cap stocks exhibit resilience across market cycles, making them suitable for investors looking for a balanced and adaptable investment approach.
• Complex Risk-Reward Dynamic: Multi-cap funds, due to their diverse stock coverage, present a more complex risk-reward dynamic compared to large-cap funds, potentially involving higher risk levels.
• Tax Implications: Taxation for multi-cap funds varies based on the holding period, with short-term capital gains (STCG) taxed at 15% and long-term capital gains (LTCG) subject to a 10% tax on profits exceeding Rs 1 lakh.
• Careful consideration of your investment horizon, risk tolerance, and financial goals is essential to determine if multi-cap mutual funds are the right choice for your investment strategy.
• Interplay of Investment Horizon, Risk Tolerance, and Goals: These three critical components—investment horizon, risk tolerance, and financial objectives—must be thoroughly analyzed before venturing into equity fund investments. Their interaction can significantly influence the performance and alignment of your investments with your broader financial plan.
• A multi-cap SIP (Systematic Investment Plan) allows investors to systematically build long-term wealth by investing in a diversified portfolio of companies across various market capitalisations.
• Multi Cap vs Flexi Cap Funds: Multi-Cap Funds are structured to create diversified portfolios comprising large-cap, mid-cap, and small-cap companies, offering exposure to a range of market capitalisations. In contrast, Flexi-Cap Funds, as the name suggests, provide investors with greater flexibility and adaptability in their investment approach.