Multi Cap funds are a class of equity funds that invest in equity and equity-linked securities of companies across all market capitalisations and sectors. We have covered the following in this article:
Best multi cap mutual funds invest in equity shares of companies of different market capitalisation across all sectors. Instead of sticking to a particular capitalisation, these funds invest in equities across large-cap, mid-cap, and small-cap stocks in the portfolio in a specific proportion. As compared to pure mid-cap/small-cap funds, these funds are less risky and prevalent among investors who are less aggressive in terms of returns.
The fund manager is well-positioned to pick stocks across capitalisation and sectors as per his outlook of the market. The investor, thus, may stay free from anxieties regarding chasing the action or missing out on rallies in a particular sphere of the market.
Apart from stock-picking, the fund manager keeps switching holdings in the fund between large-cap, mid, and small-cap stocks as he/she deems fit, based on market movements. Using the leeway, the fund managers tend to have a large-cap bias and keep on increasing or decreasing their mid-cap holdings by a small margin as and when market conditions change.
Since these funds are invested in multi cap companies, during a bull run, they deliver spectacular returns, sometimes even outperforming the pure large/mid-cap funds. This happens because, during a bull market, the underlying stocks in the funds can unlock their values and tap into the growth opportunities.
The table below shows the top-performing small cap funds based on the past 3-year and 5-year returns:
Explore other mid-cap funds here.
Multi cap funds sustain an extensively diversified portfolio consisting of stocks of different market capitalisation and sectors. These funds are an excellent way to take exposure to broader equity segments using systematic investment plans (SIP) of as low as Rs 500 to start-off.
Investors who don’t want to get into the trouble of stock-picking or deciding which market capitalisation fund would suit them may go for multi cap funds as a starter. They may switch to pure cap funds after getting the hang of markets. They are also suited for beginners and novice investors who intend to hedge their risks.
From a risk-return perspective, best multi-cap funds are capable of balancing the risk and volatility very well when it comes to blending the small caps and mid-caps in a single portfolio. At the same time, the investor may expect the stability that they would receive from a large-cap fund. During the market rally, small-caps perform well, and when there is a slump, the well-established companies tend to take hold of erosion of returns. Those who have a moderate risk appetite may think of investing in multi-cap funds.
Since multi cap funds are a class of equity funds, they are taxed like any other equity fund scheme. The dividends provided by these funds are added to your overall income and taxed as per the income tax slab you fall under. The rate of taxation of capital gains earned on multi-cap funds depends on the holding period.
Short-term capital gains, made on selling your units within a holding period of one year, are taxed at a flat rate of 15% irrespective of the income tax slab you fall under. Long-term capital gains of up to Rs 1 lakh a year are made tax-exempt. Any gains above this limit are taxable at a rate of 10%, and there is no indexation benefit provided.
Multi cap funds aim at achieving wealth accumulation by investing in stocks that offer the best combination of high growth, risk, and value. The stock picking is based on investing style, which can be value investing or growth investing. Additionally, the fund manager may consider other quantitative measures such as P/E ratio, EPS, and Enterprise value to ensure that the portfolio is composed of only quality stocks.
Like other equity funds, multi cap funds also face the market risk wherein an overall rise or fall in the value of the index leads to a fluctuation in the fund value. Such volatility is higher than that experienced by large-cap funds but lower than small-cap/mid-cap funds. The fund manager is skilled at regularly modifying the asset allocation to take advantage of market movements.
Multi cap funds charge an expense ratio to manage your money. SEBI has mandated the upper limit of expense ratio to be 1.05%. As these funds are actively-managed to harness gains from market opportunities, it might have a higher turnover ratio and associated transaction costs. Compared to pure large-caps/small-caps, multi cap funds may have a higher expense ratio. However, the quantum of gains made by multi-caps is good enough to compensate for high costs.
Multi cap funds are suitable for individuals having a medium or long-term investment horizon. Equity-Linked Saving Scheme (ELSS) is a diversified fund, which comes with a lock-in of three years. Usually, the fund experiences a lot of fluctuations during the short-run, which averages out over the long-run. Those who choose multi cap funds need to be prepared to stick around at least for the said period to enable the fund to realise its full potential.
Multi cap funds are ideal wealth creators as compared to plain large cap funds. Because of a dynamic investment strategy, these funds may accumulate more substantial wealth for achieving long-term financial goals like children’s higher education or retirement planning. Being a high risk-high return haven, these funds are capable of generating enough wealth, which may help you to retire early and pursue your passion in life.
Fund performance by way of the annualised returns is considered to be a crucial factor for the selection of funds. Investors may look for returns for a period of at least five years to ten years. One may, in fact, select funds that have consistently beaten their benchmark indices (index to which a fund’s returns are compared). They should also fare reasonably well when compared with their peer set over the longer time frames.
In case of multi-cap funds, along with the fund history, the fund manager plays a vital role in running the entire show on expected lines. A strong parentage from a trusted fund house is necessary before you invest in a fund. You need to look into the past performance and reputation of the asset management company. Ideally, it should also have a clean and long business history of at least say five years. It ensures that the fund has seen all the market cycles of slumps and rallies. Additionally, examine the track record of the fund manager as regards his success rates in delivering higher returns.
Expense ratio is the annual expense incurred by funds, expressed in percentage of their average net asset. It is charged from the overall returns earned by the fund. Expense ratio is what the mutual funds charge investors for investing on their behalf to manage their money. Direct mutual funds tend to have lower expense ratios as compared to regular mutual funds. You can save a lot on distributor commissions. You need to choose a fund which has a lower expense ratio.
With the significant risks involved, the risk-return ratio becomes a vital factor for consideration. To judge this, Sharpe Ratio is a critical metric associated with multi-cap fund’s performance. Sharpe Ratio is an indicator of risk-adjusted return. It represents the excess return given by the fund over return offered by a risk-free instrument. In short, the higher the Sharpe ratio, the better is the risk-adjusted return for that fund.
The most significant advantage of investing in multi cap mutual funds is that you gain exposure to a diversified portfolio constituted by including equity and equity-linked securities of companies across all sectors and market capitalisations. Therefore, on investing in these funds, you automatically gain the benefit of diversification.
Since the fund does not focus on only one particular sector or market capitalisation, the fund manager shifts the concentration towards that sector or capitalisation depending on the situation. Therefore, you automatically get the benefit of gaining exposure toward better-performing stocks or sectors.