Multi cap funds: For a diversified investment portfolio with long-term growth potential

Investing comes sometimes like art – a blend of different colours can enhance the appeal of the art piece. One such blend is offered by multi cap funds. Such funds have a well-diversified equity portfolio, which provides exposure to large cap, mid cap and small cap stocks within a single investment, while managing risk and optimising the return potential.

This in-built diversification can make them a suitable choice for both new and seasoned investors. In this article, we will understand the role of multi cap funds, how to incorporate them into your portfolio, and key aspects to consider when investing in these funds.

• Table of contents

1. What are multi cap mutual funds?
2. Building a portfolio with multi cap funds
3. Regular review and rebalancing
4. Stay invested for the long term
5. SIP in multi cap funds
6. Taxation guidelines for multi cap mutual funds
7. Other taxes

What are multi cap mutual funds?

Multi cap funds are mutual funds that invest in companies of different market capitalisations—large cap, mid cap and small cap. This makes them distinct from equity fund categories that can invest chiefly in one market cap.

Key features of multi cap funds:

• Invest in a mix of large, mid, and small cap stocks
• Mandated to invest 75% of the corpus in equities
• Must maintain minimum 25% allocation each in small, mid, and large caps
• Offer diversification within a single fund
• Managed by professional fund managers

These funds allow investors to benefit from the relative stability of large cap stocks and the growth potential of mid and small cap stocks.

Building a portfolio with multi cap funds

If you want to add multi cap funds to your portfolio, here are some steps to follow:

Assess your risk appetite

Before investing in any mutual fund, it’s important to evaluate your risk tolerance. Equity mutual funds require a high risk appetite in general. Among these, large cap funds may have lower risk than multi cap funds, as the latter also invests in mid and small cap stocks, which can be more volatile.

Diversification is key

Diversification helps in optimising the risk/reward balance. Multi cap funds provide diversification by investing across different market capitalisations and sectors. By investing in multi cap funds, you automatically achieve diversification without having to select individual stocks manually.

Choose the right funds

Not all multi cap funds are the same. When selecting a fund, consider:

• Performance*: Look at how the fund has performed over different market cycles.
  *Past performance may or may not be sustained in the future
• Fund manager expertise: Look at the track record and investment strategy of the fund manager.
• Expense ratio: Lower expense ratios mean higher net returns.

Regular review and rebalancing

Market conditions change and so does fund performances. Regularly reviewing your investments can keep them on track with your financial goals. If a fund underperforms the benchmark and its peers consistently, consider switching.

Stay invested for the long term

Equity investments are better suited to long investment horizons. This allows them to ride out short-term volatility and benefit from the potential for compounded growth over time. So, avoid panic selling during market downturns and stay invested for the long term.

SIP in multi cap funds

Systematic Investment Plans (SIPs) can be a convenient way to invest in multi cap funds. Here are their advantages:

• Help in rupee cost averaging
• Reduce the impact of market volatility
• Encourage disciplined investing
• Small, affordable investments

Taxation guidelines for multi cap mutual funds

Multi cap funds are treated like equity funds for taxation purposes. When you redeem your multi cap fund units, any capital gains you earn are subject to tax. The tax rate depends on the holding period:

• short-term capital gains (STCG): If units are held for less than a year, the tax rate is 20%.
• Long-term capital gains (LTCG): If units are held for more than a year, gains up to Rs. 1.25 lakh are tax-free, while amounts exceeding this are taxed at a rate of 12.5% without indexation benefits.

Other taxes

Additionally, any IDCW payments are added to the investor’s total income and taxed at the applicable slab rate. Also, a 10% TDS is deducted by fund houses on distributions over Rs. 5,000.

Conclusion

Multi cap funds offer balanced and diversified exposure across market capitalisations. This helps investors mitigate risks while optimising return potential. By assessing risk appetite, choosing a suitable funds, regularly reviewing investments and staying invested for the long term, one can potentially build wealth over time.

FAQs:

What are the differences between multi cap, large cap and mid cap funds?

Multi cap funds diversify investments across large, mid, and small cap stocks. Large cap funds focus chiefly on well-established, high-market-cap companies, offering relative stability and the potential for relatively stable returns in the long term. Mid cap funds invest chiefly in medium-sized companies and may offer better return potential in growing markets, but come with higher volatility and risk compared to large cap funds.

Are multi cap funds good for beginners?

Multi cap funds can be suitable for beginners as they offer broad diversification through a single investment. This is because they invest in large, mid, and small cap stocks. This helps balance risk and return potential while providing exposure to different market segments. Additionally, they are professionally managed, making them suitable for investors who do not have the expertise or time to track the market.

How often should I rebalance my portfolio?

It’s advisable to review your portfolio every 6 to 12 months and rebalance if necessary, depending on market conditions and personal financial goals.

What are the tax implications of investing in multi cap funds?

Multi cap funds are taxed as equity funds. When you redeem units, capital gains are subject to tax:

STCG (holding <1 year): Taxed at 20%.

LTCG (Holding >1 year): Gains up to Rs. 1.25 lakh are tax-free; amounts above this taxed at 12.5% without indexation.

Dividend Tax: Fund houses deduct a 10% TDS on dividend amounts higher than Rs. 5,000.

Are there any alternatives to multi cap funds?

There are many mutual fund categories and the alternative option will depend upon your investment horizon, risk appetite and goals. Broadly, they can include:

Equity funds: Other than multi cap funds, equity mutual fund categories include large cap funds, mid cap funds, small cap funds, flexi cap funds, sectoral/thematic funds and more.

Index funds: Passively track an index

Debt funds: Invest in fixed-income securities, suitable for investors seeking lower risk or with a short investment horizon

Hybrid funds: Invest in both debt and equities for a more balanced risk-return profile.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.