What are Multi-cap Funds?
When planning to invest in equity markets, investors may choose large-cap funds or mid-cap funds or small-cap funds depending upon their risk profiles. While large-cap funds are considered relatively stable and suitable for investors with relatively conservative to moderate risk profile, small-cap funds are generally seen as funds aiming for aggressive returns but also have a higher risk attached. At the same time, the risk profile of an investor may not remain constant throughout the investing cycle. Thus, it is crucial for the investors that their investment strategy remains flexible and adapts with the changing risk profile. Investors may consider including multi-cap funds in their investment portfolio for such flexibility.
A multi-cap fund is such a fund that enjoys the flexibility to invest across large-cap, mid-cap, and small-cap stocks. Investors may invest in the companies across the market capitalisations and may invest in any stock if they spot an investment opportunity to generate better returns for the investors. Such funds may generally be considered as a blend of large-cap stocks and mid-cap/ small-cap stocks.
With the portfolio not restricted to a specific market capitalisation, such funds may adjust to the market environments quickly and leverage the available investment opportunities wherever they are available. As such, they carry the potential to generate returns over the long term and across the market cycles, since the fund manager may swiftly make a transition from a large-cap dominated portfolio to a small-cap dominated portfolio or vice versa, as per the market conditions.
Owing to the inherent flexibility to invest across market capitalisation segments, multi-cap funds attract the highest average investment per investor folio amongst all the open-ended category of mutual funds category of funds. Such funds have an average investment of Rs. 1.43 lakh per investor folio, as against the average investment of Rs. 1.10 lakh per investor folio in all open-ended equity funds. Multicap funds have a 19% share of investors in all open-ended equity investments as at end of June 2020 with total AUM (Assets Under Management) figure of Rs. 1.36 lakh crore invested in around 95 lakh investor folios. (Source: Association of Mutual Funds in India - AMFI).
Who Should Invest In Multicap Funds?
Investors willing to capitalise on the investment opportunities available across the market capitalisation segments may consider investing with Multicap funds.
Taxation of Multicap Funds
With the investment objective of investing a minimum 65% of its net assets in equity and equity-related instruments, multi-cap funds are classified as equity-oriented funds as per the tax provisions. While the dividend income under the dividend option of such scheme is taxed at the regular tax rates applicable to the investors and is also subject to 10% TDS (Tax Deduction at Source) if the dividend income from mutual fund exceeds Rs. 5,000. This rate has been reduced to 7.5% for the remaining part of the year 2020-21 as a relief measure due to Covid-19.
The appreciation in the investment value is taxed as capital gains as and when the investor redeems mutual fund units. Short Term Capital Gains (STCG) with 15% tax (plus applicable cess and surcharge) is derived from the investment held for less than 12 months. However, if mutual fund units of such funds have been held for 12 months or more, the gains are classified as Long Term Capital Gains (LTCG). It is taxed at 10% (plus applicable cess and surcharge), after an annual exemption of Rs. 1 lakh towards such gains from sale/ redemption of equity shares and equity-oriented mutual funds.
Stamp Duty on Mutual Fund units
Effective from 01-July-2020, mutual fund units issued against purchase transactions whether through lump-sum investments or SIP or STP (purchase transactions) or switch-ins or dividend re-investments would be subject to levy of stamp duty @ 0.005% of the amount invested. Transfer of mutual fund units such as transfers between demat accounts are subject to payment of stamp duty @ 0.015%. Source: AMFI India
Note: The tax provisions, as mentioned in the article, are for illustrative purposes only, and are updated as per the Union Budget 2020 passed by the Parliament. The tax rates for capital gains will be as per the tax laws applicable on the date of redemption/ sale and not on the date of investment