A Balanced Approach of Multi Cap Funds for Long-Term Wealth

Investors looking to potentially build wealth over time often seek investment options that aim to strike a balance between growth potential and relative stability. Among the many available options in India, multi cap funds for long-term wealth creation potential have gained attention for the diversification they offer across different market capitalisations. These instruments invest in large cap, mid cap and small cap stocks, with the objective of capturing growth opportunities across the market while mitigating risk to a degree.

Table of contents

• How multi cap funds operate
• Key attributes of multi cap funds
• Should one choose multi cap funds for long-term wealth creation?
• Comparison with other mutual fund categories
• Investor profile: Who may benefit
• How to choose a suitable multi cap fund
• Tax implications for multi cap fund investments
• IDCW payouts

How multi cap funds operate

SEBI mandates that multi cap funds deploy at least 75% of their assets in equity and equity-related instruments, with a minimum allocation of 25% each to large cap, mid cap, and small cap stocks.

Fund managers can deploy the remaining 25% to seize potential opportunities or mitigate volatility—rotating between market caps based on valuations, sector trends, and macro factors. They can also invest a portion in debt instruments and cash to maintain liquidity and further reduce portfolio volatility. This contrasts with the narrower mandates of mutual funds that focus on a single market cap and enables a relatively balanced approach to potential risk and return.

Key attributes of multi cap funds

Multi cap mutual funds have several features that can help optimise long-term growth potential and risk management. These include:

• Diversification: Multi cap funds provide equity diversification across market cap segments and themes, mitigating concentration risk and reducing over-reliance on any one segment or sector of the market.
• Active management: These funds are active managed, with fund managers crafting the portfolio and modifying exposures (within regulatory limits) based on their outlook, strategy and market conditions.
• Risk/reward profile: These funds aim to combine the relative stability of large cap stocks with growth potential of mid caps and small caps, mitigating overall risk while enhancing potential long-term returns.

Also Read: Multi Cap Funds for Diversified Investment Portfolio

Should one choose multi cap funds for long-term wealth creation?

The suitability of multi cap funds for an investor depends on their goals and risk tolerance levels. Additionally, holding a long investment horizon is important.

Here are some of their benefits:

• Potentially capture broader market growth: A multi cap fund provides some allocation to each market cap segment at all times, allowing investors to participate in the potential growth of whichever segment is outperforming in the prevailing market cycle.
• Diversification mitigates concentration risk: Multi cap funds spread investments across market caps and securities, so the impact of underperformance in one stock, sector or market cap can potentially be mitigated by the other securities in the portfolio. For instance, the large cap allocation can offer relative stability in volatile markets.
• Long-term compounding potential: Since multi cap funds are considered more appropriate for long-term investing, investors can potentially harness the power of compounding over time.
• SIP for disciplined investing: SIPs (Systematic Investment Plans) can be a suitable way to invest in multi cap funds, given the long investment horizon and volatility. SIPs are affordable, allowing you to invest smaller amounts at regular instalments to potentially build your corpus over time. SIPs also mitigate market timing risk and average out the total cost of investment.

• Potential for higher returns than pure large-cap funds: Historically, because multi cap funds include mid cap and small cap companies, which are in their expansion stage, they have the potential to outperform pure large cap funds in the long term, especially in some market conditions. (Past performance may or may not be sustained in future).

For these reasons, multi cap funds may potentially align with long-term investment goals. They offer equity long-term growth potential with built-in diversification. Moreover, the mandatory minimum 25% exposure to each market cap reduces the need for the investor to rebalance between large, mid, and small cap allocations.

Comparison with other mutual fund categories

Investor profile: Who may benefit

Multi cap mutual funds can be suitable for investors who seek diversification across market capitalisations and long-term wealth-building potential and those who are comfortable with the inherent volatility of equities.

Key investor profiles:

• Multi cap mutual funds can be considered by those with a 5–10+ year investment horizon aiming to build a retirement corpus or potentially meet other long-term goals.
• While diversified, multi cap funds remain exposed to market volatility, particularly from mid and small cap allocations. Thus, investors must be willing to handle high risk, especially over the short to mid-term.
• Can be suitable for those willing to accept short-term fluctuations in pursuit of the potential for long-term capital appreciation.
• Individuals using SIP investment plan to contribute regularly, thus harnessing rupee cost averaging, can consider multi cap funds.

How to choose a suitable multi cap fund

Once you’ve decided to invest in a multi cap fund, the next step is picking a specific scheme from the many available in the market. Here are some factors to consider when choosing a suitable multi cap fund:

• Fund performance and consistency: Review the fund’s historical returns* over longer periods and across market cycles.
• Portfolio diversification/orientation: You should review the companies that the fund has chosen and the fund manager’s management style to ensure that it aligns with your objectives and risk appetite.
• Fund manager and AMC track record: The knowledge and experience of the fund management team plays a significant role in actively managed funds. So, it is advised to research the fund manager’s track record* before investing.
• Expense ratio: Cost is an important factor since it can diminish potential returns. Compare the expense ratios of the shortlisted multi cap funds, especially direct plans. Lower expense funds will have a smaller drag on potential performance.
• Alignment with your goals: Finally, a multi cap fund should fit your investment goal and risk profile.

*Past performance may or may not be sustained in future

Tax implications for multi cap fund investments

Multi cap funds are treated like equity funds for taxation purposes. When you redeem your multi cap fund units, any capital gains you earn are subject to tax. The tax rate depends on the holding period:

• Short-term capital gains (STCG): If units are held for less than a year, the tax rate is 20%.
• Long-term capital gains (LTCG): If units are held for more than a year, gains up to Rs. 1.25 lakh are tax-free, while amounts exceeding this are taxed at a rate of 12.5%.

IDCW payouts

Additionally, if you have opted for the Income Distribution cum Capital Withdrawal (IDCW) option, payouts, if any, are added to the investor’s total income and taxed at the applicable slab rate. Also, a 10% TDS is deducted by fund houses on distributions over Rs. 10,000 in a financial year.

Conclusion

For investors seeking long-term investment options, multi cap funds for long-term wealth creation potential could offer a balanced approach to equity diversification benefits, combining the potential for wealth creation of mid and small caps with the relative stability of large caps. However, understanding the risks, investing with a long-term perspective, and assessing your risk profile and unique objectives are important steps to optimise your investment journey.

Also Read: How Suitable Are Multi Cap Funds For Retirement

FAQs:

What are multi cap mutual funds and how do they work?

Multi cap mutual funds invest at least 75% of assets in stocks. They invest across large cap, mid cap, and small cap segments, with a minimum 25% allocation in each. The remaining portfolio can be allocated as per the fund manager’s discretion to navigate market shifts.

Are multi cap funds better than large cap or mid cap funds for long-term investment?

No mutual fund category is inherently ‘better’ than the other. Multi cap funds provide broader diversification than single-segment funds, potentially smoothing volatility via large cap allocation while capturing growth potential via mid cap and small cap allocations. However, the diversified nature can make them more volatile than large caps and have lower growth potential than the mid and small cap funds in certain market conditions. Thus, the suitability of any mutual fund depends on your goals, risk appetite, and investment horizon.

How do multi cap funds offer diversification benefits?

By holding companies across the top 250+ stocks in India, they spread risk and reduce over-reliance on any one market cap category, helping mitigate the impact of downturn in any single segment.

What risks should I consider before investing in multi cap funds?

• Market risk: Broad equity market volatility affects all caps.
• Managerial risk: Performance hinges on the fund manager’s decisions.
• Liquidity risk: Smaller holdings in small cap stocks may potentially face liquidity constraints.

How long should I stay invested in a multi cap fund for optimal returns?

A minimum of 5–7 years or more is generally recommended to ride out market cycles and potentially harness compounding effects.