Benefits of Investing in Multi Cap Funds
By Akhil Chugh
Date August 14, 2022
If you ever ask experienced investors about the most important rule of investing to ensure optimum returns at reasonable risk, their answer will never be putting all the eggs in one basket – i.e., having a diversified portfolio of securities.
The reason behind this is that a diversified investment will help in reducing the risk factor.
Multi Cap Funds make the work easy for you. As an investor, you won’t have to go around buying shares of different firms; instead, enjoy the advantage of a diversified portfolio by simply investing in a Multi Cap Mutual Fund.
Let’s understand more about Multi Cap Funds in this blog.
What are Multi Cap Funds?
Multi Cap Funds invest in diversified stocks of large-cap, mid-cap and small-cap across sectors. These funds capitalise on the opportunities across market caps and generate optimal returns for investors.
As per SEBI guidelines, Multi Cap Funds have to invest minimum 25% each in large-cap, mid-cap and small-cap stocks.
This was done to ensure Multi Cap schemes hold a diversified portfolio across large-cap, mid-cap, and small-cap companies and make the funds more diversified.
Why Invest in Multi Cap Funds?
Owing to its multi-cap nature, Multi Cap funds provide several benefits to investors and should be a part of every investor’s portfolio. Let’s look at some of them,
1. Diversification:
Since Multi Cap Funds invest across companies of various sizes and sectors, they offer a diversified portfolio. This diversified approach lowers the risk for you. That’s because different sectors or parts of the market can perform differently at any given time, and this spreading out of investments across keeps the risk in control.
Large caps can provide stability to the portfolio, while mid and small caps can provide a boost to the capital.
2. Long-term wealth creation:
Multi Cap Funds have the flexibility to invest in companies across the sectors that are poised to benefit from the economic activity. Thus, as an investor, you don’t miss out on any opportunity available in the Indian market. Therefore, in the long run, Multi Cap Funds are usually better wealth creators than other categories of pure funds like Large Cap Funds or Mid Cap Funds as they can take advantage of investment opportunities across the market.
3. Better risk-adjusted returns:
As fund managers can invest across all market caps – large-cap, mid-cap and small-cap, and can alter allocation based on the direction of the market in line with SEBI mandate, Multi Cap Mutual Funds can regulate risk by reducing allocation to riskier segments of the market, and minimise its impact by increasing allocation to companies that are poised to deliver in the long run.
Who Can Invest in Multi Cap Funds?
Investors who do not have sufficient time to independently research specific investments in the market can invest in Multi Cap Funds. These are mainly helpful for long-term wealth creation.
How Are Multi Cap Funds Taxed?
Tax on Multi Cap Mutual Funds depends on how long the investment is held by an investor and is taxed as follows:
Short Term Capital Gain Tax (STCG):
If you sell your investments within 1 year, the gains are classified as Short-Term Capital Gain (STCG) and you need to pay 15% tax on them.
Long Term Capital Gain Tax (LTCG):
Whereas any multi-cap investment held for more than one year, the gains are classified as taxed Term Capital Gain (LTCG). Gains of up to 1 lakh in a financial year are tax-free. Beyond 1 lakh, the gains are taxed at a rate of 10%.
Key Takeaways for Investors:
- Multi Cap Funds provide investors a better risk-return trade off – protecting from downside while delivering upside. These funds are suitable for investors with an investment horizon of at least 5 years.
- These schemes offer a diversified approach to investing in the equity markets and endeavor to make the best of every investment opportunity.
- Multi Cap Funds are ideal for first-time equity investors as it keeps the risk in control. Also, since these investors might not be aware of the risks that come with investing in companies of a specific size, a Multi Cap Fund is the best bet for them.
- Investing in Multi Cap Funds can save investor’s time and effort in switching exposure across different equity fund categories during changing market scenarios. An investor can enjoy the expertise of a fund manager of a Multi Cap Fund who can make investment decisions based on market conditions while ensuring maximum returns for investors.
- Decision on investing in a Multi Cap Fund should be based on the investor’s risk profile, financial goals and investment horizon.
Net Brokers believes, that if you are looking for pure diversification across market caps and are willing to take on the higher risk level of the mid and small caps then Multi Cap Funds are the right choice for you.
Having a long-term investment horizon is the ultimate key to success for investments in Multi Cap schemes.
For more information, get in touch with us today!
Download our mutual fund app & start investing for your long-term financial goals.
Happy investing!