To qualify as a genuine all-rounder in cricket, one must not only be able to bat and bowl well but also field well. Kapil Dev and Ravindra Jadeja are two Indian cricketers who fit this description well. Multi-Cap funds are similar. As its title suggests, they 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.
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.
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 thus offer 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 too 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.
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 mutual funds, investors must not only focus on increasing returns but also on reducing risks.
Taxation of multi-cap funds is no different from any other Equity mutual fund. If one sells their investments within 1 year, the gains are classified as Short Term Capital Gain (STCG) and 20% 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 12.5%. In next fortnight’s column, we shall turn the spotlight on a few multi-cap schemes, their market cap mix and performances.
Ashok Kumar
Head of LKW-India.
He can be reached at ceolotus@hotmail.com
(Views expressed here are personal)