Mutual funds like equity funds attract a large number of investors year after year. But why is it that investors are willing to pay the expense ratio which these funds bear instead of directly investing in the stock market? The primary reason is professional fund management. Not all investors have a penchant for carefully studying the stock market, calculating risks, and making investment decisions. Also, stock market investment can be expensive and also invites concentration risk.
On the other hand, market linked schemes like equity mutual funds can offer diversification by giving investors exposure to a basket of credible stocks through a single investment. Also, one can start their investment with equity funds with a small amount, unlike the stock market where a single share can sometimes cost thousands of rupees.
If investing in equity mutual funds for long term wealth creation suits your books, you may consider diversifying your investment portfolio with multicap funds.
What is a multicap fund?
A mutlicap fund is an open ended equity scheme that invests the majority of its investible corpus in equity and equity related instruments of companies spread across market capitalization. As per market regulator SEBI norms, a multicap fund must invest a minimum of 25 percent each of its overall portfolio in small cap, mid cap, and large cap stocks. Since almost 75 percent of the portfolio is exposed to market volatility, multicap funds are considered to be a very high investment.
Why invest in multicap funds?
Multicap schemes offer diversification – Multicap funds invest in a basket of securities and equity and equity related instruments of companies belonging to various sectors and industries that are spread across market capitalizations. This way, multicap funds are able to offer true diversification by spreading their portfolio in large, mid, and small cap market space. If you invest in a large cap fund, you might not be able to receive enough diversification as these funds are confined to a specific market cap. For example, tomorrow even if large cap markets turn volatile, the portfolio manager must maintain a minimum exposure of 80 percent. In such a scenario, the multicap fund might be able to manage its portfolio in a better way and benefit from other lucrative markets.
Active portfolio management – A multicap fund is usually under the management of elite fund managers, market researchers, and analysts. They study the market, under the potential risks, and then build a portfolio of stocks that have growth potential. A multicap portfolio managed by such experts has a chance of earning higher returns.
Choice of SIP and lumpsum investment – Based on their current income flow and future income needs, investors can decide whether they want to make a lumpsum investment in multicap funds or whether they want to start a SIP. Lumpsum investing requires the individual to invest a large sum at the beginning of their investment cycle and will also expose their entire investment to market upheavals. On the other hand, through a Systematic Investment Plan (SIP), they can invest the small, fixed sums regularly and create wealth over the long term.
Multicap funds do not guarantee returns. Although they are very high risk investment schemes, over the long run these funds can mitigate the investment risk and generate decent returns. Investors must only invest after consulting their financial advisor.
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