Mutual funds: Why invest in multi-cap funds now?

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Data from the Association of Mutual Funds of India (Amfi) show net inflows in multi-cap funds touched Rs 3,569 crore in September, the highest in the equity funds category.

Multi-cap funds invest in diversified stocks of large-cap, mid-cap, and small-cap across sectors. These funds capitalize on the opportunities across market caps and generate optimal returns for investors.

Last year, the markets regulator changed the guidelines of investments in which multi-cap funds have to invest a minimum of 25% each in large-cap, mid-cap, and small-cap stocks.

This was done to confirm multi-cap schemes hold a diversified portfolio across large-cap, mid-cap, and small-cap companies and make the funds more diversified.

Fund houses had to align their portfolios to those new limits by January 31, 2021. Before the new rules kicked in, fund managers of multi-cap funds invested the next proportion in large-cap funds.

The Securities and Exchange Board of India (Sebi) had also introduced a brand new category called Flexi-cap which has flexibility in allocation across market caps and there’s no restriction limit.

This helped fund managers to avoid reshuffling the multi-cap portfolio and lots of existing multi-cap funds switched to the Flexi-cap category. At present, most Flexi-cap funds have the next allocation to large-cap stocks.

Why multi-cap funds now?
Experts say that investors fear that the bullish momentum in mid-and small-cap funds could see a reversal for an extended period.

Moreover, most new investors who have started investing in inequities within the last 15 months haven’t seen a meaningful correction within the markets.

In fact, since March 24, 2020, when the exchange hit a bottom due to the Covid-19 pandemic, the BSE Mid-cap Index has gained 166%, and also the BSE Small-cap Index has gained 223%.

The 30-share Sensex is up 134% during the identical period. Investors are viewing multi-cap funds because they supply the steadiness and low volatility of large-cap stocks and better returns of mid-caps and tiny caps, albeit high volatility.

Should you invest?
In multi-cap funds, fund managers maintain the allocation mandated by Sebi, and the rest 25% is dynamically allocated as per the fund house’s proprietary investment model to optimize the overweight of large-caps, mid-caps, and small-caps.

Typically, the fund managers evaluate the business environment of the company, the valuation of the company based on fundamentals, and the capability of the management to execute and scale up the business.

The short-term capital gains tax will be 15% of the gains for a holding period less than one year and 10% for more than a year if gains are more than Rs 1 lakh in a financial year.

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