How multicap is different from multi-asset allocation fund

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Recently, the DSP Multi-Asset Allocation Fund’s NFO was launched. Similarly, the WhiteOak Capital Multi-Cap Fund’s NFO closed on September 14th. Both of these have the word “multi” in their names, which can naturally confuse investors. What’s the difference between multicap and multi-asset allocation funds? Which one is right for you? Let’s understand this whole story. Multicap mutual funds fall under the equity mutual fund category. According to SEBI, a multicap fund should have a minimum of 75% of its total assets invested in equities, and out of that at least 25% in large-cap, mid-cap, and small-cap stocks.

The aim of multicap funds is to provide investors with diversification across various market capitalizations, so they can potentially achieve better returns with minimal risk.

On the other hand, multi-asset allocation funds fall under the hybrid category of mutual funds. According to SEBI’s rules, they need to invest in at least three asset classes, with a minimum of 10% allocation in each asset class. These asset classes could be equities, debt, gold, or real estate.

The goal of multi-asset allocation funds is to diversify across all asset classes to reduce the risk associated with investing heavily in a single asset class. While multicap funds focus on different market cap stocks, multi-asset allocation funds diversify across various asset classes.

Now, let’s see how taxes are applied to both. In multicap mutual funds, taxes are applied similarly to equity funds. On the other hand, tax implications in multi-asset allocation funds can be a bit more complex. It depends on the asset allocation, whether it’s in equity or debt. So, taxes can be applied as either equity or non-equity funds based on the fund manager’s decisions on asset allocation.

If it’s equity-oriented, it will be treated like an equity fund, and gains held for more than one year are considered long-term gains. No tax is applied on gains up to one lakh rupees. Gains exceeding one lakh are taxed at a rate of 10%. However, if the investment is held for less than one year, it’s considered short-term gains, and a 15% tax is applied.

On the other hand, in non-equity-oriented funds, if the holding period is less than three years, it’s considered short-term capital gains and is added to the investor’s income for taxation. If the holding period is more than three years, it’s considered long-term capital gains and is taxed at a rate of 20%, with the benefit of indexation.

You might also want to know which one provides better returns. Let’s look at the data. Based on ACE Mutual Fund’s numbers as of September 4th, multicap funds have provided an average return of 20% in the past year, 28% in three years, and 13% in five years. In contrast, multi-asset allocation funds have given an average return of 15% in the past year, 17% in three years, and 13% in five years.

So, it’s clear from this data that multicap funds offer higher returns compared to multi-asset allocation funds. However, remember that multicap funds are essentially pure equity funds, so they come with higher risk.

Now, let’s also understand who each type of fund is suitable for. Investors who are moderate risk-takers, have a minimum investment horizon of at least five years, and want to build wealth with a diversified portfolio can consider investing in multicap funds.

Multi-asset allocation mutual funds are suitable for investors who want to take very minimal risks, seek consistent returns, and can invest for five years or more. These investors can benefit from diversifying their investments across various asset classes. However, for those who desire higher returns, it’s better to invest in multicap equity schemes, where a significant portion of their investment goes into equities. If you still have any confusion despite this information, you can seek the assistance of a financial advisor.