Investors often seek a slice of every category of market capitalisation while investing in the market. One of the ways of achieving this objective is to study and consider multi-cap funds.
As its title suggests, these are equity mutual funds that do not focus on a particular capitalisation category of companies but invest across multiple sectors and capitalisations. This makes them more diverse providing balanced exposure when compared to other traditional equity mutual fund schemes like Large or Mid-Cap or Small-Cap funds.
While fund managers have the freedom to invest across different market capitalisations, in September 2020, the Securities and Exchange Board of India (SEBI) revised its earlier norms and asked the fund houses to invest a minimum of 25% each in large-cap, mid-cap and small-cap stocks in their respective multi cap schemes.
The remaining portion that the fund has can be invested across market-caps or in debt and money market instruments. Before this announcement, the fund managers in this category were free to choose stocks across market-capitalisation categories sans any upper or lower threshold.
There was no minimum or maximum restriction on how much they were investing in large, mid, or small-cap companies. While multi-cap funds can potentially outperform large-cap and mid-cap funds when the markets are on the ascent, they remain subject to market volatility because, at any given point, they must have 50% exposure to mid-cap and small-cap stocks.
Multi-cap funds do however offer relative flexibility to the fund manager to switch between stocks and accord additional or lesser weightage to stocks of a particular market capitalisation, depending on the fund manager’s reading of the market trend, in order to achieve higher returns. Like every Equity category fund, multi-cap funds have a long-term investment horizon and tend to accentuate risk if invested for short-time frames, given that market volatility has greater impact in the near-term.
Taxation of multi-cap funds is no different from any other equity MF. If one sells their investments within 1 year, the gains are classified as Short Term Capital Gain (STCG) and 15% tax is payable. Whereas, for any multi cap investment held for more than one year, the gains are classified as Long Term Capital Gain (LTCG). Such gains of up to R1 lakh in a financial year are tax free. Beyond R1 lakh, LTCG is taxed at the rate of 10%.
The primary feature and advantage of investing in multi cap funds is diversification. Multi-cap funds and Flexi cap funds are two variants of an equity fund that invest across market capitalisations. Of the two, multi-cap is perceived (not necessarily rightly) to be relatively safer as the market cap segregation is already provided by SEBI, while in a flexi-cap fund, the fund manager has the freedom to invest in any proportion across different market capitalisations.
More importantly, while investing in MFs, investors must not only focus on increasing returns but also on reducing risks.
Ashok Kumar
Head of LKW-India.
He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)