Multi cap mutual funds are open ended equity schemes that invest in large cap, mid cap and small cap stocks. They offer the benefits of diversification of your portfolio and a balance between stability and high returns.
Large cap, mid cap and small cap funds invest in large, medium, and small-sized companies in terms of market capitalisations. Many investors find it difficult to choose the investment category and how much to invest. Multi cap funds solve this problem as it invests across all market capitalisations.
Now, you may want to check the best multi cap funds for investment in 2022.
List of Best Multi Cap Mutual Funds 2022
The following are some of the best-performing multi cap funds in terms of their annualized returns for the past five years.
| Name of the Multi Cap Fund | 5-Year Annualized Returns |
| Quant Active Fund- Direct Plan- Growth | 25.19% as of April 13 2022 |
| Sundaram Multi Cap Fund- Direct Plan- Growth | 15.94% as of April 13 2022 |
| Baroda BNP Paribas Multi Cap Fund- Direct Plan- Growth | 15.47% as of April 13 2022 |
| Nippon India Multi cap Fund- Direct Plan- Growth | 14.54% as of April 13 2022 |
| Invesco India Multi cap Fund- Direct Plan- Growth | 13.72% as of April 13 2022 |
| ICICI Prudential Multi cap Fund- Direct Plan- Growth | 13.06% as of April 13 2022 |
How Do Multi Cap Funds Work?
Like other mutual funds, multi cap mutual funds also have certain limitations on what kind of stocks they can hold.
Based on the guidelines issued by SEEBI in September 2020, these funds must invest at least 75% of their assets in equity and equity related investments. Its portfolio must hold a minimum of 25% assets in large cap stocks, 25% in mid cap funds and 25% in small cap stocks. Fund managers have the flexibility to switch between stocks, which lets them achieve high returns.
According to the SEBI product categorization circular, large cap funds must invest primarily in the stocks of India’s top 100 publicly listed companies. Mid cap funds invest in companies ranked 101st to 250th, while those which invest in companies ranked 251st onwards are small cap funds.
The mid cap and small cap allocation of multi cap funds allow them to get market-beating returns in bullish markets. Their large cap allocation offers stability and a potential for higher returns in bearish markets. These mutual funds are suitable for investors looking for wealth creation in the long run.
Who Should Invest in Multi Cap Funds?
The following types of investors may consider investing in multi cap funds:
- Moderate risk-takers: Investors willing to take moderate levels of risks for higher potential returns may consider this investment. Since multi cap funds have 50% asset allocation in mid-cap and small-cap stocks, they can be risky in the short term.
- First-time investors: Inexperienced investors, who are not aware of the risks of investing in companies with smaller capitalisation, may prefer multi cap funds. Moreover, their diversified portfolio helps to keep investment risks in control.
- Investors unsure about their investments: Many investors find it difficult to choose between investing in large cap companies for higher stability or mid cap/small cap companies for higher growth. Multi cap mutual funds help to solve such a dilemma.
- Investors with a long term investment horizon: A long term investment horizon is ideal for equity investments as it acts as a cushion against market volatility and helps you benefit from compounding.
- Those wanting exposure to mid cap and small cap stocks: If you are uncomfortable with taking high risks but want the growth opportunity of mid cap and small cap stocks, you may consider multi cap funds.
Benefits of Investing in Multi Cap Funds
The following are some of the benefits of investing in multi cap funds:
- Portfolio diversification
The best multi cap mutual funds invest in companies of different sizes and market sectors to offer higher portfolio diversification. As different parts of the market or different sectors perform differently at any time, this spreads out the risks of investments. Thus, if one asset performs poorly, the performance of other assets would balance it.
- Exposure to different sectors of the economy
As these mutual funds are not restricted to a particular market cap/sector, you can get exposure to all important sectors of the economy. With this, you do not have to miss out on any opportunity in the financial market.
- Flexibility for fund managers
Fund managers of multi cap funds can shift assets from one asset class to another to suit the market conditions. When the economy is expanding, they can take advantage of the fast-growing mid-cap and small-cap markets. During an economic downturn, they can shift asset allocation to large cap funds and reduce risks.
- Easy and time-saving investment
Multi cap funds are a great choice for investors who do not have the knowledge or time to diversify their investments. The fund manager does the hard work of picking the right stocks and keeping track of investments for you.
- Good for wealth creation
Multi cap mutual funds combine the benefits of favorable returns during bearish market phases with high alpha in favorable market conditions. As they invest in different companies across various market sectors, they have a high potential of tapping into market wide financial opportunities.
Benefits of Investing in Multi Cap Funds
- Performance of Multi Cap Funds
The returns from a multi cap fund depend a lot on the skill and experience of its fund manager. He/she has to pick the right stocks based on his/her overview of the current market conditions. Thus, investors do not have to worry about chasing after returns or missing out on rallies in a particular sector.
Generally, multi cap funds tend to outperform large cap funds, index funds and hybrid funds in favorable market conditions. They carry lesser risk compared to pure mid cap and small cap funds. Over the last several years, top multi cap funds have beaten the average market returns by a decent margin.
- Risks Associated with Multi Cap Funds
Since these mutual funds invest 50% of their portfolio in mid cap and small cap stocks, they carry short-term risks. Multi cap mutual funds are riskier than large cap funds but less risky than pure mid cap and small cap stocks.
As these funds have a diversified portfolio, the risk is spread across a range of sectors. Fund managers of multi cap funds can also change the risk profile by changing their asset allocation. For example, they can increase the risk exposure to riskier stocks in a robust economy to ensure higher earnings.
- Taxation on Multi Cap Funds
Since multi cap funds are equity funds, they follow the same taxation rules. Capital gains made by selling units of these mutual funds are taxed depending on the holding period of your investment. The following taxes are applicable on capital gains.
- Short Term Capital Gains (STCG) Tax: If you sell/redeem your multi cap mutual fund investment within a year of investment, you need to pay 15% taxes plus applicable cess and surcharge.
- Long Term Capital Gains (LTCG) Tax: LTCG is applicable on multi cap investments that you have redeemed after a year. A tax exemption is applicable on capital gains of up to Rs. 1,00,000 in a financial year, and gains beyond this are taxed at 10%.
Things You Should Consider before Investing in Multi Cap Funds
Here are some of the things that you will want to consider before investing in multi cap funds:
- Risk appetite: Multi cap mutual funds carry market risk and are susceptible to volatility. Their prices rise and fall with fluctuation of the underlying value of their investments. As an investor, you will want to check if the risk appetite of your investment matches your risk appetite.
- Past performance: You will want to check the historical performance of any mutual fund before purchasing it. Check the fund’s annualized returns for at least 5 years and since its inception to get a good idea about its potential. However, you should be aware that a fund’s historical returns do not always reflect its future performance.
- Fund’s objective: Multi cap funds aim to generate wealth by offering the best combination of returns, risk, and value. The fund manager may pick stocks based on his/her investment style, such as value or growth investing, according to the fund’s goals. You will want to ensure that the fund’s investment objective is in-line with your financial goals.
- Investment horizon: These mutual funds tend to experience short-term volatility, which gets balanced in the long run. That is why you will want to have a medium to long-term investment horizon so that your investment has enough time to reach its full potential. If you want an investment with long-term goals such as retirement plans, children’s education, buying a house, etc., you can invest in multi cap funds.
- Expense ratio: All mutual funds carry a charge called the expense ratio, which is payable on an annual basis. This is charged to cover all expenses involved in managing your money, including administrative and operating expenses. Multi cap funds may have a higher expense ratio as they are more actively managed.
- Investment mode: You can invest in top multi cap mutual funds through a lump sum or an SIP (Systematic Investment Plan). The latter helps to average out the cost of purchasing mutual fund units and grow your investment through the power of compounding.
The main benefit of investing in multi cap funds is that it allows investors to get exposure to a diversified portfolio. As these invest in equities across various sectors and market capitalisation, it averages out their risks. Before investing, you need to know the basics of mutual fund investments and take a look at the above-mentioned factors.
So, start investing through a platform that makes financial planning easier. If you want to invest in direct plans of the multi cap funds, visit Kuvera.in to find the best-performing mutual funds.
Frequently Asked Questions
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What are regular and direct plans for multi cap mutual funds?
Regular plans involve investing in mutual funds through mutual fund distributors or brokers. Investors can also choose to directly invest with the AMC (Asset Management Company) through direct plans. Direct plans tend to carry a lower expense ratio as AMCs do not have to pay commissions to distributors/brokers.
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What is the AUM (Assets Under Management) of mutual funds?
AUM is the accumulated market value of all assets held by a mutual fund. It is an indicator of a fund house’s size, returns made from investments, and the capital available with the fund manager to make further investments. Investors can compare the AUM of similar schemes to find the most popular scheme.
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Are multi cap funds and flexi cap funds the same thing?
No, flexi cap funds are a new category of mutual funds that SEBI introduced in 2021 to differentiate funds with flexible asset allocation. In contrast to multi cap funds, there are no limitations and complete freedom to change asset allocation across market capitalization. These funds invest in stocks of large cap, mid cap and small cap companies similar to multi cap funds.
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What is a TER (Total Expense Ratio) of a mutual fund?
Mutual fund houses charge a collective fee called TER for operating and managing a mutual fund. This charge is expressed as a percentage of a scheme’s daily NAV (Net Asset Value). The lower a scheme’s TER, the higher will be its NAV, making TER an important parameter when choosing a mutual fund.
In India, mutual fund houses can charge a maximum TER of 2.25% for equity funds and 2% for debt funds.
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How are dividends from multi cap funds taxed?
Dividends from multi cap funds are taxable at the hands of investors. Any dividend earned gets added to their taxable income and taxed as per the applicable income tax slab. For dividend income above Rs. 5000, a 10% TDS (Tax Deducted at Source) is applicable.
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