A Multicap fund is an equity mutual fund that invests across industries and market capitalization segments, such as large-cap, mid-cap, and small-cap. These mutual funds typically outperform in various market conditions, reducing volatility while providing good relative returns to investors in the long run. As a result, multi-cap funds are ideal long-term investment options for retail mutual fund investors who may lack the expertise to understand various stages of the investment cycle.
What are Multicap Funds?
Before investing, there is always a difficulty with the category of Mutual Funds in which you should invest. Do you want to invest in large-cap, mid-cap, small-cap, multi-cap, or sectoral funds? Each category has advantages and disadvantages that must be considered.
While large-cap funds provide greater portfolio stability, mid-cap and small-cap funds provide exceptional returns. Sectoral funds can boost profits if a specific industry is performing exceptionally well. Nonetheless, one fund category stands out among the crowd due to its considerable flexibility: multi-cap.
Multicap mutual funds meaning, in other words, are diversified equity funds that invest in stocks of companies with varying market capitalisations. The investments are made in varying proportions to meet the fund’s investment objective. This is a brief summation of multicap fund meaning, which will help you move forward with this article.
Top Multicap Funds to Invest In
Aside from stock selection, the fund manager switches the fund’s holdings between large-cap, mid-cap, and small-cap stocks as market movements dictate. Using the leeway, fund managers have a large-cap bias and continue to increase or decrease their mid-cap holdings by a small margin as market conditions change.
Because these funds invest in a variety of companies, they produce spectacular returns during bull markets, sometimes outperforming pure large/mid-cap funds. This occurs because the underlying stocks in the funds can unlock their values and capitalise on growth opportunities during a bull market.
|Mutual fund||5 Yr. Returns||3 Yr. Returns||Min. Investment||Rating|
|Quant Active Fund Growth||25.16%||34.52%||—||NA|
|Mahindra Manulife Multi-Cap Badhat Yojana Regular Plan-Growth||—||29.5%||—||NA|
|ICICI Prudential Smallcap Fund – Direct Plan-Growth||14.12%||27.6%||₹5000||3 stars|
|ICICI Prudential Smallcap Fund||12.81%||25.81%||₹5000||3 stars|
|Baroda Multi-Cap Fund Plan A Growth||16.67%||25.47%||—||NA|
|SBI Contra Fund – Direct Plan – Growth||13.93%||24.06%||₹5000||2 stars|
|SBI Contra Fund||13.17%||23.25%||₹5000||2 stars|
|Invesco India Multicap Fund Growth||16.58%||22.99%||—||NA|
|BNP Paribas Multi Cap Fund Growth||16.07%||22.25%||—||NA|
|Principal Multi Cap Growth Fund Growth||17.5%||21.51%||—||NA|
Benefits of Investing in Multicap Funds
Improved Risk-Adjusted Returns: Better risk management comes with the benefit of diversification. For example, if small-cap companies are underperforming, fund managers can automatically shift their focus to other companies, such as large-cap companies, to manage risk. As a result, risk-adjusted returns in multi-cap funds outperform those in single-cap funds.
Professional Administration: The performance of multi-cap mutual funds is heavily reliant on the fund managers. This is because fund managers make allocation decisions. An experienced fund manager will be able to capitalize on market conditions and optimize investments to provide the best possible returns.
Extremely Liquid: Multi-cap funds, like all other mutual funds, are highly liquid investments. These are open-ended equity schemes that can be sold at any time in order to recoup your investment. They do not have a contract. You can sell them whenever you need money.
Excellent for Wealth Creation: Multi-cap funds have historically outperformed inflation in the long run. Investing in multi-cap funds can be an excellent way for investors to multiply their wealth.
Read More: Best Performing Mutual Funds in India
Risks of Investing in a Multicap Fund
Risk Tolerance: A Multicap fund is one of the safer investment options in the stock market, but it still comes with medium risk. So, be sure you understand what medium risk is and if it is right for you currently or not before investing.
Long Term Investments: A multicap fund provides good returns, but when you are investing for a long time, especially more than five years. So, if you want short term returns, multicap funds might not be best suited for you. You should at least invest in these funds for more than five years for the best results.
Tax Benefits of Investing in Multicap Funds
It is the post-tax returns that are important. To determine this, you should be familiar with how multi-cap funds are taxed. The capital gains from selling your multi-cap fund are taxed depending on how long you held the investment.
Short Term Capital Gain (STCG): If you sell your investments within one year, the gains you receive from your investment are classified as Short Term Capital Gain (STCG) and must be taxed at 15%.
Long Term Capital Gains Tax (LTCG): Gains on multi-cap investments held for more than a year are taxed and considered as Long Term Capital Gains (LTCG). Gains of up to one lakh rupees in a fiscal year are tax-free. Gains over one lakh rupees are taxed at a rate of 10%.
Best Features of Multicap Mutual Funds
- Multicap funds invest 65% of their amount in company stocks. These companies have different capital values, offering you exposure to different stocks and making your portfolio diverse.
- You can reduce risk on multi-cap funds. Fund managers can invest a large portion in the large-cap company and a small amount in the mid-cap or small-cap company and drive more profit.
- For better allocation and more profits, it is necessary to hire a fund manager with a profitable history.
Taxability of Multi-cap Funds
When investing in multi-cap funds, the investors will have to pay taxes on the capital gains. if the investors sell the units within one year of purchasing them, they will have to pay 15% tax on those units under the short-term capital gains.
Whereas if you hold units for more than a year, it will be considered a long-term capital gain. In this, the gains up to Rs. 1 Lakh are free of tax, and for the amount above Rs. 1 Lakh, you will have to pay 10% tax.
Multi-cap funds invest in a variety of market capitalization segments. There are no restrictions on allocations to specific market cap segments. Multi-cap funds’ large-cap allocation provides stability in volatile markets. In contrast, mid-cap and small-cap allocations allow multi-cap funds to outperform the market and generate significant returns for investors. A Multi-cap fund is appropriate for investors with moderately high to high-risk appetites for long-term financial goals such as marriage, child education, and retirement planning.
The fund managers determine the proportion of large, mid, and small-cap stocks in multi-cap funds. Investors have no control over it. Fund managers adjust their allocation based on economic and market conditions. If they believe it is time to be conservative, they increase the portfolio’s allocation of large-cap stocks. On the other hand, if they believe that market conditions will improve in the future, they will increase their allocation to mid-cap and small-cap stocks.
The process and prerequisites for investing in multicap mutual funds are the same as investing in other mutual funds. Investing in these funds does not require a large sum of money. To invest in multi-cap funds, you can start a SIP with as little as Rs. 500.
It allows you to earn higher returns by investing in small-cap companies with high growth potential while keeping the risk balanced by investing in large-cap companies. The risk is moderate, and the long term returns are excellent. So why not put money into them?
A Multicap fund is best for investors with a risk appetite as the fund is allocated to large-cap as well as small-cap and mid-cap companies.
PGIM India Flexi Fund, Axis Flexi Cap Fund and SBI Focused Equity Fund are some of the best multicap funds in India.
Read more about XIRR in Mutual Funds.