Multi Cap Mutual Funds

There are large cap funds that invest in India's biggest companies, there are mid cap funds that invest in mid-sized companies, there are small cap funds that invest in small companies, and then there is a fund category that invests in big, small and mid-sized companies. This fund type is Multi Cap Mutual Fund.

Every equity mutual fund invests the money gathered by all the investors in the stocks of companies.

According to regulations, mutual funds need to be specific in their investment approach. A large cap fund can only invest in the stocks of top 100 companies based on market capitalization. Similarly, small cap funds can invest in companies that are ranked below 250, and so on.

However, multi cap is the only category that doesn't have a defined structure by regulation on which size and sector of companies it can invest. And hence, these funds invest in large cap, mid cap, and small cap stocks. Now the proportion of these stocks could vary. It depends on the fund manager. They look at the market conditions and accordingly adjust the proportion of large cap, mid cap, and small cap stocks in the portfolio of a multi cap mutual funds.

When the economy is expanding, the fund manager can go for a higher exposure in mid cap and small cap stocks to take advantage of their fast growth. On the other hand, when the economy is in a slowdown, they might take a higher exposure in large cap stocks.

• Diversification:

  Since multi cap funds invest across companies of various sizes and sectors, they offer a diversified portfolio. This diversified approach lowers down 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.

• Exposure to all key sectors of the economy:

  Since these funds don't restrict themselves to a particular market cap or sector, you get exposure to all the key sectors and companies within them that are driving the Indian economy forward. What is means is that you don't miss out on any opportunity available in the Indian market

• Right portfolio for the prevailing market condition:

  The flexibility of deciding the mix between large, mid and small cap allows these funds to change the portfolio composition so that it is best suited for the market condition. For instance, if the mid and small cap stocks become overvalued and it looks like that space is heading for a big space, the fund manager can move to large caps and take a defensive position.

• First Time Investors:

  Multi cap funds due to their diversified portfolio 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.

• Investors in a dilemma:

  A lot of investors get confused about whether they should go for funds that invest in big companies for their relative stability or go for mid and small caps which can give high growth but come with risk. Multi cap funds solve that problem.

• Investors with a Long Term Investment Horizon:

  While investing in any equity funds, the investment horizon should be a long one. So if you are an investor, who has a long-term financial goal in mind like early retirement, children's education, building a house, etc. investment in a multi cap fund can help in fulfilling your goals. An investment horizon of more than 5 years is required while investing in these funds. A long horizon acts as a cushion against the volatility of equity markets and also helps you reap the benefits of compounding.

• Investors who want exposure to mid and small caps without taking too much risk:

  Some investors don't want to miss the growth opportunities that mid cap and small cap funds offer, but they also don't want to take risk or are not comfortable with the volatility they might see if they invest in fund investing only in small or mid caps.

• Investment Goals:

  Before investing in these funds, one should be clear about their investment goals., if you want to make the most out of your investment in multi cap funds, then you should have an investment horizon of at least 5 years.

• Risk:

  When you invest in multi cap funds, eventually your money is getting invested in the stock markets. So you are exposed to risk that comes with investing in stocks. In the short to medium term markets can be volatile and you need to be ok with this before you consider investing in these funds.

• Expense Ratio:

  You should be cut-clear about the expenses that bite into your returns. In order to manage the multi cap fund you're planning to invest in, the Asset Management Companies charges you a fee called an expense ratio. This is basically the charge to cover the fund's administrative and operating expenses like the fund manager's salary. It is charged on an annual basis.

• 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%.

Let's look at some of the top-performing mutual funds helming the multi cap category. The performance is based on the basis of returns provided by the fund in the last 3 and 5 years.

*It must be noted that these are not fund recommendations. Besides, they are also not the only way through which you can rank funds.

It is quite easy to invest in Multi Cap Funds on ET Money. All you need to do is just follow these below-mentioned steps: