Multicap Funds: Your All-Weather Investment Companion
By Akhil Chugh
Date November 24, 2024
Multicap funds are a versatile investment option designed to perform across all market phases, making them a reliable choice for investors seeking long-term growth. By investing in companies across large-cap, mid-cap, and small-cap segments, these funds offer a balanced mix of stability, growth, and high-return potential. As the Indian economy continues to navigate global challenges and domestic opportunities, Multicap Funds serve as an all-weather investment strategy to build a resilient and growth-oriented portfolio.
In this blog post, we will delve into the concept of Multi-Cap Funds, exploring what they are, how they work, and why they are considered an all-weather investment companion.
What are Multicap Funds?
Multicap 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, Multicap 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 Multicap Funds are All-Weather Strategy?
Owing to its multi-cap nature, Multicap funds provide several benefits to investors and should be a part of every investor’s portfolio. Let’s look at some of them:
1. Market Neutral Approach:
Since Multicap 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.
Multicap Funds are not bound by rigid market cap constraints, allowing fund managers to adjust allocations based on their outlook. This adaptability makes them resilient in different market cycles.
2. Potential for Outperformance:
Multicap 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, Multicap Funds are usually better wealth creators than other categories of mutual funds like Large Cap Funds or Flexi Cap Funds as they can take advantage of investment opportunities across the market.
3. Optimal Risk Management:
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, Multicap 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.
How Are Multicap Funds Taxed?
Tax on Multicap 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 20% 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 Long Term Capital Gain (LTCG). Gains of up to Rs1.25 lakhs in a financial year are tax-free. Beyond Rs1.25 lakhs, the gains are taxed at a rate of 12.5% with no benefit of indexation.
Key Takeaways for Investors:
- Multicap 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 endeavour to make the best of every investment opportunity.
- Multicap 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 Multicap Fund is the best bet for them.
- Investing in Multicap 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 Multicap Fund who can make investment decisions based on market conditions while ensuring maximum returns for investors.
- Decision on investing in a Multicap Fund should be based on the investor’s risk profile, financial goals and investment horizon.
In the world of investments, where uncertainties are a constant, having a strategy that can weather various market conditions is invaluable. Multicap Funds, with their flexibility, diversification, and adaptability, emerge as a compelling option for investors seeking a well-rounded approach to wealth creation.
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