BAJAJ BROKING
January 25, 2025
9 mins read
When it comes to mutual funds, flexibility is often the key to striking the right balance between growth and stability. Multi-cap funds stand out as a good option for investors who want exposure to the best of all market segments. Far from other funds that stick to a particular market capitalization, multi-cap funds have the freedom to adapt to market trends. With their diversified approach and ability to move through the changing market conditions, they are designed to increase returns while keeping all risks in check.
However, what truly sets multi-cap funds apart? How do they work, and why should they be part of your investment portfolio? Let’s take a look at multi-cap fund meaning and learn why they are a preferred choice for Indian investors.
Multi-cap funds are one of the most popular and flexible types of mutual funds. Other funds that are limited to one category, i.e., large-cap or mid-cap, but multi-cap funds invest across all types of market capitalization. This includes large-cap, mid-cap, and small-cap stocks. It is because of this flexibility that allows them to get into various growth opportunities, thereby making them a preferred choice for long-term investors.
At its core, multi cap funds are managed to balance risk and return by diversifying across various market segments. For example, while large-cap stocks offer stability and growth, mid-cap and small-cap stocks can provide higher growth potential with more risk. Combining these two can create a balanced portfolio with better returns, that also caters to investors with different risk profiles.
For example, if you are looking for a fund that invests in the top companies (large-cap), but also wants exposure to growing businesses like an emerging tech startup (small-cap), a multi-cap fund does just that. It spreads the investments across the entire market, which eventually reduces the impact of any single sector or stock’s performance.
A multi-cap fund works by pooling investors’ money and investing it in a range of stocks across the market. The fund manager decides how much to invest in large-cap, mid-cap, and small-cap stocks as per research, market conditions, and investment objectives.
Investment Strategy
The fund manager uses market research to allocate funds across different market caps. This strategy is all about capturing growth opportunities while also managing risks. For example, when large-cap stocks are overvalued, the manager might shift more money into mid-cap or small-cap stocks.
Asset Allocation
There is no fixed ratio between large-cap, mid-cap, and small-cap investments in a multi-cap fund. The flexibility allows the fund manager to adjust the allocations based on the performance of various sectors or market conditions. This asset allocation helps the fund perform quite great in different market phases.
Balancing Risk and Return
By investing in a mix of stocks across different market caps, multi-cap funds offer a balanced approach. Large-cap stocks offer stability, mid-cap stocks add growth potential, and small-cap stocks offer high-risk but high-reward opportunities. This diversified strategy can help mitigate risks and ensure steady returns over time.
Let's take a look at some of the distinct features of a multi-cap fund:
Characteristic | Description |
Diversified Portfolio | The biggest advantage of multi-cap funds is diversification. By investing in large, mid, and small-cap stocks, the fund reduces the overall risk associated with market fluctuations. Even if one segment (like small-caps) underperforms, the other segments (large-caps) may perform better. This balances out the overall returns. |
Suitable for Long-Term Investment | Multi-cap funds are a great option for long-term investors who want to build wealth gradually. The diversified portfolio helps manage risks while also allowing you to take advantage of the growth in various sectors over and with time. |
Experienced Fund Management | Multi-cap funds are managed by experienced fund managers who analyse market trends and adjust the investment strategy accordingly. This ensures that the fund stays aligned with the investors’ risk and return expectations. |
Flexibility in Asset Allocation | Multi-cap funds are not bound by specific rules when it comes to allocation among the three categories of stocks. This means the fund manager can actively change the weight of the portfolio depending on the market conditions. This creates a more adaptable and responsive investment. |
Balanced Growth and Stability | By investing across the market cap spectrum, these funds aim to strike a balance between the stability offered by large-cap stocks and the growth potential of mid and small-cap stocks. This mix allows investors to benefit from both steady returns, capital gains and high growth opportunities. |
Multi-cap funds come in different types based on their allocation strategy. Here’s a brief on how they cater to different investment preferences:
These funds primarily invest a significant portion of their portfolio in large-cap companies while also maintaining a smaller allocation in mid-cap and small-cap stocks. In general, these are ideal for investors who are looking for relatively stable returns and lower risk. This is because large-cap stocks typically belong to established companies that have a proven track record.
In these funds, mid-cap stocks form the majority of the portfolio, with moderate exposure to large-cap and small-cap stocks. They strike a perfect balance between growth and risk, by offering higher return potential than large-cap-focused funds but with more volatility. Investors having a medium risk appetite often prefer this option.
These funds distribute their investments flexibly across large-cap, mid-cap, and small-cap stocks without leaning heavily on any specific category. The allocation entirely depends on the fund manager’s strategy and market conditions. This makes these multi-cap funds suitable for investors seeking maximum diversification and balanced growth opportunities.
Understanding taxation is important when investing in multi-cap funds, as it directly impacts your overall returns. In India, equity-oriented funds, including multi-cap mutual funds, are taxed based on the holding period of your investment:
Short-Term Capital Gains (STCG)
If you redeem your multi-cap fund units within one year of investment, the gains are taxed at 20%.
Long-Term Capital Gains (LTCG)
If you hold the units for over one year, the gains are taxed at 12.5%, provided the total LTCG exceeds ₹1.25 lakh in a financial year. Additionally, gains below ₹1.25 lakh are tax-exempt.
Besides this, here are some key points to remember:
Indexation Benefit
Long-term investors can leverage the indexation benefit to reduce tax liability by adjusting the purchase price for inflation while calculating LTCG.
Tax-Saving Potential
Multi-cap funds do not qualify for tax deductions under Section 80C. However, the long-term capital gains tax of 12.5% is relatively low compared to other investment options.
Disclaimer: The information presented above is for general reference only and does not constitute comprehensive legal or tax advice. As tax implications can vary based on individual circumstances, investors are strongly advised to consult their own tax advisor to understand the specific implications of their participation in the scheme.
Timing plays an unmatched role in increasing returns from multi-cap funds. However, it should not overshadow the importance of long-term investing. While these funds are indeed designed to perform across market cycles, certain conditions make them particularly favorable:
Market Volatility:
Multi-cap funds thrive during volatile markets, due to their diversified nature. When some sectors underperform, others may compensate.
Economic Recovery Periods:
Investing during an economic rebound may allow you to capture growth potential across market caps as businesses recover and expand.
Stable Market Outlook:
A stable market environment with positive growth indicators creates an ideal scenario for consistent returns from multi-cap funds.
Goal-Oriented Timing:
Invest in multi-cap funds when you have long-term financial goals like retirement planning, buying a house, or children’s education.
Note that while market timing can influence returns, the key to success with multi-cap funds lies in maintaining a very disciplined investment approach.
While multi-cap funds offer diversification and growth opportunities, they are not without risks. Although these risks are inherent, they can be managed by conducting thorough research, choosing a reliable fund house, and maintaining a long-term investment horizon. Here’s a brief on the key risks associated with these investments:
Allocation Risk:
The fund manager’s allocation decisions between large-cap, mid-cap, and small-cap stocks significantly impact performance. Overexposure to underperforming segments can drag returns.
Liquidity Risk:
Investments in small-cap and mid-cap stocks may face liquidity challenges, especially during market downturns. This can hinder the fund’s ability to rebalance portfolios efficiently.
Management Risk:
Multi-cap funds are actively managed, and the success largely depends on the fund manager’s expertise. Poor decisions or misjudgments in stock selection and sector allocation can straightaway lead to underperformance.
Sectoral Risk:
Exposure to specific sectors may increase concentration risk. In case a particular sector underperforms, it could directly affect the fund’s overall returns, despite diversification.
Tax Implications:
Frequent switching between market caps by the fund manager might lead to higher transaction costs. This may indirectly affect investor returns.
Investing in the right multi-cap fund requires a very careful evaluation. You need to take several factors into consideration. Listed below are some important factors to keep in mind:
Fund Manager’s Track Record:
Assess the expertise and experience of the fund manager. Only a skilled manager with a history of consistent performance and who knows the ins and outs of multi-cap fund meaning can add value to your investments.
Portfolio Composition:
Analyse the fund’s allocation across large-cap, mid-cap, and small-cap stocks. Make sure that your portfolio aligns with your risk appetite and investment goals.
Historical Performance:
While past performance does not quite guarantee future returns, it definitely provides valuable insights into how the fund has performed under different market conditions. This is a good way to evaluate the potential outcome and risks.
Risk Appetite:
This is yet another important factor. Understand your risk tolerance. Multi-cap funds can be volatile due to exposure to mid-cap and small-cap stocks.
Expense Ratio:
A high expense ratio can erode your returns. Hence, look for funds that has competitive fees and transparent cost structures.
Investment Objective:
Clarify your financial goals, be it wealth creation, retirement planning, or funding education. Make sure that the fund you have chosen aligns well with your objectives.
Investment Horizon:
Multi-cap funds work best for long-term goals. Hence, you may want to avoid these funds if you have a short investment horizon or require liquidity.
Tax Efficiency:
Consider the tax implications of your investment, especially for long-term holding, and how it fits within your overall financial planning.
Multi-cap funds are an excellent investment option for those seeking a diversified portfolio with a mix of stability and growth. However, choosing the right multi-cap fund isn’t just about past performance but about aligning the fund’s strategy with your financial goals and risk tolerance. With SEBI’s strict guidelines ensuring transparency, investors can rest assured of balanced fund management.
By adopting a disciplined, long-term investment approach, multi-cap funds can be a powerful way to wealth creation. Needless to say, the ease, flexibility and potential growth sets multi-cap funds apart as a smart choice for investors in today’s market.
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Multi-cap funds must invest a fixed percentage in large-cap, mid-cap, and small-cap stocks, while flexi-cap funds have the freedom to allocate funds without any restrictions based on market capitalization.
Yes. Multi-cap funds are beginner-friendly due to their diversification across market caps. It balances out the risk and potential returns effectively.
Multi-cap funds win here because they provide exposure to all market caps. This reduces the reliance on a single segment, which in turn offers a balanced growth and risk profile.
While multi-cap funds are indeed diversified, they are subject to market risks. However, they are relatively safer as compared to single-cap funds but are not immune to risks. Investing in it requires a risk-aware approach.
Yes! Multi-cap funds offer liquidity, and investors can redeem them anytime. However, some funds may have an exit load for early withdrawals.
Yes, gains from multi-cap funds are taxed based on the holding period, with short-term and long-term capital gains tax applicable.
Mid-cap funds can offer high growth potential. However, the timing entirely depends on market conditions, risk appetite, and investment goals.
The best multi-cap fund depends on factors like fund performance, management, and alignment with your financial objectives. Always consult an advisor before investing. However, the top 3 performing multi-cap funds in 2024 include Axis Multicap fund, LIC MF Multi Cap Fund, and Baroda BNP Paribas Multi Cap Fund.
Multi-cap funds are best suited for investors looking for diversified exposure across market caps with moderate risk tolerance and a long-term investment horizon.
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