Multicap Mutual Funds

What Are Multicap Funds?

Multicap mutual funds are a category of equity mutual funds that invest in large-cap, mid-cap, and small-cap companies. SEBI's mutual fund categorisation requires these schemes to allocate at least 25% of their assets to each of the three market capitalisation segments. The balance of 25% is left to the fund manager, who can invest it across any segment depending on the investment strategy. This mandatory allocation is what makes the category different from those funds investing in a single market-cap segment.

How Do Multicap Mutual Funds Work?

Like other mutual funds, the multicap fund also pools in money from multiple investors. The portfolio is divided across three market capitalisation segments. Large-cap companies generally form one part of the portfolio, while mid-cap and small-cap companies are included in equal proportion. The fund manager selects stocks within each segment and adjusts the portfolio whenever required. The mandatory allocation across market-cap segments continues to be maintained even as individual holdings change, giving the fund manager flexibility to shift the remaining allocation based on prevailing market conditions.

The portfolio has a few defining characteristics:

• Stocks selected from three market capitalisation segments
  
• Mandatory allocation across large-cap, mid-cap, and small-cap companies
  
• Additional allocation based on the fund manager's investment approach
  
• Portfolio adjusted to maintain the required allocation
  
• Net Asset Value (NAV) reflects changes in the market value of the portfolio
  

Key Features Of Multicap Funds

One of the defining aspects of multicap mutual funds is the way the portfolio is structured. Instead of concentrating on a single market-cap segment, these funds maintain investments across large-cap, mid-cap, and small-cap companies. SEBI has also laid down minimum allocation requirements for each segment, making the portfolio structure different from many other equity mutual fund categories.

• Investments spread across three market-cap segments
  
• Minimum 25% allocation to each of the large-cap, mid-cap, and small-cap categories
  
• Remaining allocation invested according to the fund manager's strategy
  
• Portfolio rebalanced whenever required
  
• Available through SIP and lump sum investment modes
  

Benefits Of Investing In Multicap Funds

A multicap mutual fund gives investors exposure to companies of different sizes. Some businesses may already have an established market presence, while a few others may still be growing. Bringing them together within one portfolio creates exposure to different parts of the equity market through a single investment, without requiring the investor to pick individual market-cap segments themselves.

• Exposure to companies across different market-cap segments
  
• Diversification through a single mutual fund
  
• Portfolio managed by a professional fund manager
  
• Investment through SIP as well as lump sum
  
• Suitable for long-term equity participation
  

Risks Associated With Multicap Mutual Funds

Different market-cap segments do not always move in the same direction. During some market phases, large-cap stocks may perform better; in other phases, mid-cap or small-cap stocks may take the lead. Since multicap mutual funds invest across all three segments, the portfolio remains exposed to changes across the broader equity market. Risk levels can also vary between schemes depending on the stocks selected and the fund manager’s allocation approach.

Equity Market Risks

• Different market-cap segments may not perform in the same way
  
• Market cycles can favour one segment over another
  
• Portfolio performance changes with movements across the equity market
  

Company-Related Risks

• Business conditions change over time
  
• Companies go through periods of slower growth
  
• Changes in profitability are common across businesses
  

Investment-Related Risks

• The fund does not guarantee returns
  
• Investment performance varies with the holding period
  
• Inflation affects the purchasing power of investment returns
  

Who Should Invest In Multicap Funds

The choice of a mutual fund often depends on investment goals, risk appetite, and the intended investment horizon. Multicap mutual funds invest across companies of different market capitalisations, making them a category that some investors consider for diversified equity exposure. They are generally associated with long-term investing because equity markets may experience short-term fluctuations.

• Building an equity portfolio across different market-cap segments
  
• Investing with a longer investment horizon
  
• Regular investing through a Systematic Investment Plan (SIP)
  
• Adding diversification to an existing equity portfolio
  
• Participating in different segments of the equity market through a single fund
  

How To Choose The Best Multicap Mutual Fund

Multicap mutual funds invest across three market capitalisation segments, but every scheme builds its portfolio differently. The choice of stocks, allocation beyond the mandatory limits, and overall investment approach can vary from one fund to another. Reviewing a few important aspects can help while comparing different schemes.

Market-Cap Exposure

• Understand which segment receives the highest allocation
  
• Observe changes in allocation over different periods
  
• Compare the portfolio with similar multicap funds
  

Investment Philosophy

• Read the scheme's stated investment objective
  
• Look at how the portfolio is constructed
  
• Review whether the strategy has remained consistent
  

Portfolio

• Analyse the frequency of portfolio adjustments
  
• Understand whether the portfolio remains diversified
  
• Compare turnover with similar schemes
  

Costs

• Review the expense ratio
  
• Understand applicable exit loads
  
• Consider other related costs while comparing schemes
  

Expense Ratio And Costs Of Multicap Funds

When investing in a multicap mutual fund, not every cost is paid directly by the investor. Some expenses are adjusted within the scheme itself, while others apply only when specific transactions take place. Understanding these costs helps while comparing different funds within the category.

The Total Expense Ratio (TER) remains one of the key expenses. It is the fee collected by the fund house for managing the fund. As per SEBI regulations, the Total Expense Ratio for equity mutual funds can go up to 2.25% on the initial slab of Assets Under Management (AUM), reducing progressively as the scheme's AUM grows.

The overall cost may include the following components:

• Fund management and administrative expenses
  
• Costs associated with maintaining investor records
  
• Expenses incurred while buying and selling securities
  
• Exit load, wherever applicable
  
• Distributor commission under regular plans
  

How To Invest In Multicap Mutual Funds

Multicap mutual funds are available across different investment platforms. Investors can invest directly with the fund house, and online stockbroking platforms also allow you to invest in them.

To invest through Kotak Neo:

• Log in to your Kotak Neo account
  
• Click on Other Investments
  
• Open the Mutual Funds section
  
• Find the Multicap mutual fund of your choice
  
• Select either SIP or lump sum
  
• Enter your investment amount
  
• Review all the details once and confirm the transaction
  

Taxation On Multicap Mutual Funds

Tax on Multicap mutual funds arises when units are redeemed. It also arises if a dividend is received under the Income Distribution cum Capital Withdrawal (IDCW) option, taxed according to the investor's applicable income tax slab.

Since these funds are classified as equity mutual funds, the applicable tax depends on the holding period.

These rates are subject to change. Hence, checking the latest rate before investing is advisable.

Why Invest In Multicap Funds?

Multicap mutual funds bring together large-cap, mid-cap, and small-cap companies in a single portfolio. There is no need to choose one market-cap segment over another. Every fund follows SEBI's allocation requirements, while the fund manager decides how the remaining portfolio is invested. The category is commonly considered by investors planning to stay invested over the long term.

Disclaimer: Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.