Difference Between Multi-Cap and Focused Equity Funds

In the financial market, there are various types of equity funds based on the characteristics of portfolio companies. Some funds are sectoral equity funds, some are based on the market capitalization of underlying stocks, while others are known for their separate investment strategy.

In this blog, we will be discussing the difference between Multi-Cap and Focused Equity funds as well as the similarities between the two. Both Focused Equity funds and Multi-Cap funds can invest in funds across market capitalization but have key differences.




What is a Multi-Cap Equity Fund?

A Multi-Cap Equity Fund is a diversified fund that invests in the stocks of companies of all market capitalization sizes. The investments are carried out in varying proportions to meet the fund’s investment objective.

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Earlier, most of the holdings of multi-cap equity funds were invested in the large-cap companies and these funds had a large bias. But in September 2020, SEBI (The Securities and Exchange Board of India) made it mandatory for multi-cap funds to invest 25% each in small-cap, mid-cap, and large-cap companies. Due to this, the multi-cap funds sold off their large-cap holdings and invested in small-cap and mid-cap companies to follow the guidelines set by SEBI.

What is a Focused Equity Fund?

A Focused Equity Fund is a type of mutual fund that invests in a limited number of stocks. These types of funds can invest in a maximum of 30 stocks as per the guidelines laid by SEBI. A typical mutual fund can hold 50-100 stocks which isn’t the case with a focused equity fund. This fund can invest in small, medium, as well as large-sized companies and makes carefully researched and selective bets on a few companies to get maximum ROI.

What are the Major Differences between Multi-Cap and Focused Equity Funds?

Let’s take a look at the major difference between Multi-Cap and Focused Equity Funds:

 

Parameter

Multi-Cap Equity Fund

Focused Equity Fund

Growth Potential

It offers a lower growth potential than a focused equity fund.

It offers higher growth potential if most of the stocks in the fund perform well in the market.

Sectors

It invests in companies across sectors.

It invests only in a few sectors

Risk Appetite

Due to the diversification of stocks, this fund is less risky.

This type of fund is riskier as there is no diversification.

Asset Classes where the fund invests

As per SEBI, this fund is required to allocate its investment by company size.

 

–> Small-Cap – 25% minimum

   –> Mid Cap – 25% minimum

–> Large Cap – 25% minimum

This fund can invest up to 30 stocks of all company sizes.

The Expertise of Fund Manager

Similar to regular funds where the fund manager is required to diversify the risk and select the high potential companies of all sizes.

The fund manager plays a crucial role in selecting the top 30 stocks with the best ROI potential.

Theme

The fund is less likely to focus on a particular theme.

This fund may adopt a unique theme.




Multi-Cap Equity Fund vs Focused Equity Fund – Similarities

Now that you know the difference between Multi-Cap and Focused Equity funds, let’s find out the similarities between the two funds:

1.    Taxability – Both the funds are taxed as equity funds. LTCG (Long-Term Capital Gains – the gains made by selling the units that are held for more than a year) are taxed at 10% and STCG (Short-Term Capital Gains – the gains made by selling the units that are held for less than a year) are taxed at 15%.

2.    Can Invest in Companies of any Size – Both types of funds can invest in companies of all sizes. This isn’t the case with specific funds like mid-cap or large-cap funds.

Key Points to Remember  

       Multi-Cap funds can invest in different companies of all market capsizes.

       Focused funds can invest in a maximum of 30 companies of any market cap size.

       Multi-Cap funds are less risky than focused funds.

       In focused equity funds, the fund managers select companies carefully with a thorough research for maximum ROI.

       Focused equity funds have a higher growth potential than multi-cap funds.

       Multi-Cap equity funds are best for investors who have a lower risk appetite and focused equity funds are best for investors with high to moderate risk appetites. 

Frequently Asked Questions

1.    What makes multi-cap funds less risky than equity funds?

       Multi-cap funds’ holdings are spread across many companies and the bad performance of one company has a lesser impact on the overall portfolio. Compared to this, focused equity funds are more vulnerable to the poor performance of portfolio companies as the risk is across a lesser number of companies.

2.    As per SEBI, how many focused equity funds can an AMC launch?

       As per SEBI, each AMC or asset management company can launch only one scheme under the mutual funds’ a category like focused funds, large-cap funds, multi-cap funds, etc. This rule was introduced by SEBI to avoid any confusion among the investors.




Summing Up

Both Multi-Cap Equity funds and Focused Equity Funds are unique funds suited for different investors with different risk profiles. Focused funds are risky funds but offer a better return on investment and multi-cap funds are less risky but with a lower potential for growth. As a smart investor, you must know the difference between Multi-Cap and Focused Equity funds and pick the best option as per your requirement and risk appetite.