These days when you think of investment, mutual funds come first to mind. Gone are the days when the investment sector was dominated by PPFs, post office deposits, and bank fixed deposits. A drastic drop in the interest rates has made these traditional instruments a not-so-favorite of the young Indian investor. However, investing in these avenues was much simpler as opposed to mutual funds. Investing in mutual funds is not complex, what we mean is that the process is pretty straightforward – you choose a fund, you decide the mode of investment (SIP/lump-sum), you decide the investment sum and you make the investment. The stage where novice investors are usually stuck is in deciding what type of mutual fund scheme to invest in.
Before investing in any mutual fund scheme investors must make sure that they fully understand the investment objective of the scheme and also the kind of risks this fund is taking to outperform the competition.
If you have a high risk appetite, a long investment horizon, and wish to invest in a mutual fund that invests in a diversified portfolio of assets, then you can consider investing in multicap funds.
What are multicap funds?
Multicap funds invest across market capitalizations. They are different than large cap, mid cap, and small cap equity that have maximum exposure to stocks of a specific market cap. Multicap funds invest in all three market caps and in the same proportion. As per market regulator SEBI guidelines, multicap funds must invest a minimum of 25% each in mid cap, small cap, and large cap stocks. The small cap market is deemed as the most volatile market, however, the multicap portfolio has 50% stocks comprising of mid and large cap stocks, making it a promising investment product.
What makes Multicap Funds stand out from other equity funds?
Before we discuss multicap and its features do understand that all equity funds carry an equal amount of risk. Also, none of them guarantee returns. In fact, no mutual fund investments can promise returns. Returns are always subject to market risks.
Having said that, multicap funds offer true diversification than other equity funds. For example, if the small cap markets turn lucrative, a large cap fund cannot take advantage of that because it has to ensure that it has maximum exposure to large cap stocks throughout. Similarly, if the mid cap markets turn volatile, the mid cap fund manager cannot shift the portfolio composition to other market caps, and the fund is more likely to suffer losses. In both these instances, a multi cap fund might be able to fair better. In case, the large cap markets are lucrative, it can benefit from the 25% exposure that it already has to these markets and if the mid cap markets turn volatile, the overall portfolio can balance risk by generating profits from the small cap and large cap space. Thus, a multicap fund has the potential to generate constant returns in changing market cycles and can bring stability to an investor’s portfolio.
Also, multicap funds are managed by a team of professional fund managers who are constantly scouting and analyzing potential stocks that can add value to the scheme’s portfolio. Those who invest in multicap funds not only get exposure to an array of credible stocks but also receive active risk management. Investors can make a lump-sum investment or opt for the Systematic Investment Plan to start their investment journey.
Before rushing to any investment decision, investors are advised to consult their financial advisor first.
