Equity funds are of various types. There are large cap funds predominantly investing in the top 100 companies ranked in terms of market capitalization. There are mid cap funds investing in mid cap company stocks. Then there are small cap funds that invest in companies ranked beyond 250th in terms of market capitalization. If you are unsure about which equity mutual fund to invest in, or if you are looking for a scheme that combines the best of all three market caps, you may consider diversifying your investment portfolio with multi cap funds.
Multi cap funds – How do they work?
Multi cap funds work pretty much similar to how other equity mutual funds work. They pool funds from investors sharing a common investment objective and use it to buy stocks and invest in other equity related instruments. But when it comes to asset allocation, it is what sets them apart from other equity funds. A multi cap must invest a minimum of 25% in all three market caps. That means 25% in large cap markets, 25% in small cap markets, and 25% in large cap markets. The fund manager does not have to worry much about market cap when scouting and auditing potential stocks for building the fund’s investment portfolio.
What are some of the advantages of Multicap Funds?
They offer true diversification – Unlike other equity funds that have maximum exposure to a specific market cap, a multi cap portfolio enjoys true diversification. Other equity funds offer diversification but mostly under the same market cap. However, when it comes to multi cap funds they offer true diversification as their portfolio is spread across sectors and industries with companies of various sizes. A portfolio spread out across various sectors can control risk as different markets can perform differently.
Exposure to most crucial sectors – Multi cap funds do not hold back when building their investment portfolio. They seek exposure to stocks of companies belonging to various sectors and industries spread across market capitalizations. This way, investors get exposure to stocks of companies that are the driving force of the nation’s economy. Investors get an opportunity to be a part of their success and share the yields that these companies generate by indirectly investing small percentages through multi cap funds. When you invest in a multi cap fund, you invest in a portfolio of stocks belonging to companies that are flourishing and have the growth potential to reach new heights.
Adapting across market cycles – Since multi cap funds invest in small cap, mid cap as well as large cap stocks, they are building an investment portfolio that is more likely to withstand different market cycles. They have a highly flexible portfolio that has a mix of stocks belonging to all types of market capitalizations. Investors are less likely to miss out on investment opportunities after investing in multi cap funds. Fund managers can leverage existing investment opportunities by increasing their exposure to certain stocks and also mitigate risk when certain markets turn volatile.
How to invest in multi cap funds?
Investors can either consider making a lump-sum investment or they can even opt for the Systematic Investment Plan (SIP). Through SIP, they can invest small, fixed sums monthly and gradually build a commendable corpus in the long run. Since multi cap funds are best suited for investors with a long term investment horizon, investors can start a monthly SIP and continue investing till their investment objective is attained. They can even take help of the online SIP calculator to determine the future returns that their SIP investments might help them fetch over a certain period.
