What is a multicap fund? This blog post will provide you everything you need to know about multicap mutual funds—different types, factors to consider before investing, risks, etc.
About multicap mutual funds
Multicap funds are different from other kinds of mutual funds. Large-cap funds invest in companies with large market caps, mid-cap funds invest in mid-sized firms, and small-cap funds invest in small companies. But a multicap mutual fund invests across small-, mid-, and large-size companies.
What are multicap funds?
Multicap mutual funds are exactly what the name indicates: These funds invest the corpus in stocks of various companies with different market capitalizations. It means that you can invest in small-cap, mid-cap, and large-cap companies at the same time in a multicap fund.
Types of multicap funds
There are different types of multi-cap funds. We will discuss some of them.
- Funds with focus on mid/small-cap stocks: They are a type of multicap fund scheme that invests in middle- or small-cap segments. For downside protection, they have some exposure to large-cap stocks.
- Funds with the primary focus on large-cap stocks: The main focus of these multi-cap funds is to invest in the large-cap segment. After this, they try to invest in mid/small-cap segments.
- No particular focus: Some multi-cap funds don’t have a specific investment mandate. Instead, they search for investment opportunities in the market. Their only focus is to find stocks that can perform well.
When should you invest in a multi-cap equity fund?
Multicap funds provide an excellent option for investment. Are you in a dilemma about investing in small, large, or others? If yes, then in such situations, investing in top multi-cap mutual funds can be a great idea. We discuss situations suited for investments in multi-cap funds.
Investing for the first time
When you are a first-time investor, you tend to be particular about your investment and experience market fear. Looking at the diversification of multi-cap funds, you should invest in them as the risks in these funds are in control.
Exposure to small- and mid-cap funds with less risk
Are you willing to invest in small or mid-cap funds but don’t want to take higher risks? You should then think of investing in a multi-cap fund.
Are you planning for your future? If yes, then a long-term investment horizon can be a better option. Whether you are planning to buy a house, build a nest egg, or save for higher education for your child, investing in such funds for more than five years can be a good idea.
What are the risks associated with multi-cap mutual funds?
Everything has its pros and cons. Similarly, when you invest in multi-cap mutual funds, there are a few risks associated with it.
The multicap schemes have volatility, which can be riskier for you. While investing, you need to consider various factors that can save you from risks. Many things also depend on fund managers, so you should be careful regarding that.
The risks can be much higher if you mostly invest in small/mid-cap companies. Even if you invest for a shorter period, it’s risky to invest in multi-cap funds. But with proper planning and strategy, you can mitigate the risks associated with these funds.
Factors to consider before investing in a multicap fund
Investing in multicap funds is not as easy as it appears. Before investing in a multi-cap fund, you need to plan and consider the following factors.
Fund managers play an essential role when you choose multi-cap funds. They have the mandate to protect your portfolio from significant loss, and more importantly, to generate profit for you. Before you invest, you should zero in on the best fund manager. Remember, while choosing a fund manager, you should check their track record to analyze their capabilities.
It is essential as fund managers to diversify their portfolio to achieve their objectives. So, you must take special care of this factor before investing in multicap funds.
You must also consider the portfolio concentration factor, as this ensures diversification. Often, your fund manager would invest in one sector to which he may have a bias.
Dividend distribution tax
Typically, a 10% tax is deducted by the fund houses before they pay out the dividends to the holders of the units. So, you must check this factor before investing in these funds.
While an investor redeems units of a multi-cap fund, the gains received are subject to capital gains tax.
Capital gains tax
Do you know what capital gains taxes are? It is a kind of tax applicable to you or any investor when they profit after selling their scheme’s units. An important point you must be aware of is that the tax rate varies depending on the period you hold the unit.
For example, in the case of short-term capital gain, when the holding period is < 1 year, the tax rate is nearly 15%. While in the case of long-term capital gain, if the holding period is≥ 1 year and it’s up to 1 lakh, then the individual will be charged no tax, whereas if it is more than 1 lakh, then the tax rate generally is about 10%, excluding indexation.
Multicap funds invest the corpus in equity-associated stocks or portfolios of equity of various companies with different market capitalizations. Some common types of multi-cap funds are funds with a focus on mid/small-cap stocks, funds with a primary focus on large-cap stocks, and no specific focus.
If you are a first-time investor, confused about where to invest, and looking for a long-term investment that is less risky, then you can consider multi-cap mutual funds. Of course, there are a few risks associated with it, but by considering important factors, you can mitigate them.