Are you an investor seeking a well-diversified investment option in the Indian market? Look no further than multi-cap funds. These versatile investment instruments have gained popularity among investors due to their ability to navigate various market conditions and deliver potential growth. 

What are multi-cap funds?

Multicap funds are mutual funds that invest in a diversified portfolio of stocks across various market capitalizations. Unlike specific-cap funds like large-cap or small-cap funds, multi-cap funds offer flexibility to fund managers in choosing stocks from different segments of the market.

This flexibility allows them to seize opportunities across large, mid, and small-cap stocks based on market conditions and growth prospects. 

Advantages of multi-cap funds

Diversification: By investing in companies of different market capitalizations, multi-cap funds provide diversification benefits. This helps spread the investment risk across various sectors and reduces the impact of market volatility on the portfolio.

Potential for high returns: Multicap funds can generate higher returns than large-cap or mid-cap funds. By investing across market caps, they can capture growth opportunities across different market segments.

Flexibility: The fund manager of multi-cap funds can dynamically allocate investments based on market conditions. This flexibility allows them to capitalize on emerging trends, which can enhance returns.

Risk management: Multicap funds tend to have a lower risk than pure mid-cap or small-cap funds. This is because they have exposure to large-cap stocks, which are typically more stable and less volatile.

 How do multi-cap funds work?

Multicap funds pool money from various investors to create a diversified portfolio. Based on their research and analysis, skilled fund managers carefully select stocks from large, mid, and small-cap segments. The allocation to each segment may vary over time, depending on market conditions and the manager’s outlook.

Fund managers continuously monitor and review the portfolio, making necessary adjustments to capitalize on potential growth areas or mitigate risks. They employ fundamental analysis, market research, and risk management strategies to make informed investment decisions.

 What is the tax liability of multi-cap funds?

The tax liability of multi-cap funds in India is similar to that of other equity-oriented mutual funds. Multicap funds are considered equity funds for taxation purposes if they have a minimum allocation of 65% in equity and equity-related instruments. Here’s a breakdown of the tax implications: 

Short-term capital gains (STCG): If you hold multi-cap funds for less than one year, any gains from their sale are classified as STCG. STCG is taxed at a flat rate of 15% under the provisions of the Income Tax Act.

Long-term capital gains (LTCG): If you hold multi-cap funds for more than one year, the gains are categorized as LTCG. Currently, LTCG exceeding INR 1 lakh in a financial year is subject to a tax of 10% without the benefit of indexation.

Dividend distribution tax (DDT): If you receive dividends from multi-cap funds, the fund house deducts DDT before distributing the dividend. However, effective April 1, 2020, DDT has been abolished, and dividends are now taxable in the hands of the investors as per their applicable tax slab. 

To wrap up

When considering multi-cap funds, evaluating your risk tolerance, investment goals, and investment horizon is essential. Do keep in mind that multi-cap funds are subject to market risks, and past performance is not indicative of future results.