There are different types of equity mutual funds which are categorised as per the market capitalization of the underlying stocks, the sectors the fund invests in, or the theme(s) it follows.
But here, in this article, we will talk about focused equity funds and multi-cap funds as investors often find it difficult to distinguish between, considering how they both seem to have a diversified portfolio of stocks. While these funds do seem to have more in common, there are some fundamental differences that clearly set them apart.
The Difference
Multicap and Focused Equity Funds are fundamentally different from each other in terms of the strategy employed by them.
Multicap mutual funds invest their corpus in equity stocks of companies that fall under the three market capitalizations – large-cap, mid-cap, and small-cap. In September 2020, SEBI in a new directive mandated a minimum 25% allocation in large, mid, and small-cap stocks each. The remaining 25% is to be invested in debt and money market instruments.
As a side note – as per AMFI definition, large-cap consists of the top 100 stocks listed on the stock exchange, mid-cap consists of the next 150 stocks, and small-cap consists of those ranked 251st onwards. This list gets updated on a half-yearly basis.
Focused equity mutual funds, on the other hand, can invest in a maximum of 30 stocks, as per SEBI guidelines. This cap on the number of stocks makes it relatively concentrated. Unlike multi-cap mutual funds, there is no minimum allocation to any market cap. Here the main goal is to select stocks of companies that fall within the investment philosophy and objective of the scheme and could help in long-term wealth creation.
The Similarities
Now coming to the similarities. Both these funds are equity-oriented which means they are comparatively high-risk mutual funds. Both aim to generate wealth over the long term and are therefore suitable for planning long-term financial goals. For both these categories, the same capital gains tax rules apply. Short-term capital gains, made by selling units held for less than a year, are taxed at 15%. Long-term capital gains, made by selling units held for more than a year, are tax-free up to Rs 1 lakh while gains above Rs 1 lakh are taxed at 10% during each financial year.
Conclusion
Eventually, the choice between the two fund categories comes down to individual preferences and needs. After considering your financial goals, your risk appetite, and your time horizon, you can decide between multi cap and focused equity mutual funds. Investors who do not want to invest in a single market capitalization category and are looking for diversification could consider investing in multicap funds. For investors who want a concentrated strategy, they could consider adding focused equity mutual funds to their portfolio.
