Investing in mutual funds has proved beneficial for a lot of investors. The key is to ensure and have a long term investment horizon so that your investments are able to compound and generate maximum returns. First time investors are often left confusing on which mutual fund scheme to invest in. That’s quite natural since there are a plethora of mutual funds to choose from. Every investment scheme has a different investment objective, invests in different securities, and allocates assets depending on its nature and the benchmark it wishes to outperform. However, investors with a very high risk appetite who do not mind exposing their finances to volatile markets for generating higher returns consider market linked schemes like multi cap funds.
What is a multi cap fund?
A multi cap fund is an open ended equity mutual fund that invests the majority of its investible corpus in stocks of companies spread across market capitalization. As per SEBI guidelines, a multi cap fund must invest a minimum of 25 percent each in small cap, large cap, and mid cap company stocks. The fund manager may invest the remaining 25 percent of the portfolio in equity or debt related instruments based on the investment objective and the nature of the multi cap scheme. Multi cap funds are best suited for individuals who aren’t sure whether they must invest in large cap funds, mid cap funds, or small cap funds. Multi cap schemes offer the best of all three asset classes. The large cap component of the portfolio of a multi cap fund offers stability whereas the small and mid cap components of the portfolio try to generate risk adjusted returns by taking higher risks. Multi cap funds aim to deliver by building a portfolio from company stocks across various markets, sectors, and industries.
Should you invest in multi cap funds via SIP or lumpsum?
Mutual fund investors have the option of starting their investment journey either by making a one-time lumpsum investment or by opting for the Systematic Investment Plan. A lump sum investment is made by the investor right at the beginning of the investment cycle. A lumpsum investment requires the investor to make a large investment sum in the multi cap scheme. However, through the Systematic Investment Plan, the investor can make small, fixed investments periodically till his or her investment objective is accomplished.
Why is SIP is a better investment option?
Apart from the fact that it allows the investor to invest a small sum regularly instead of making a hefty one-time investment, there are several other advantages that SIP has over lumpsum investing. Through SIP, investors can buy more units in the long run and surprisingly reduce their average cost of purchase. Whenever the NAV of the multi cap is low due to whatever reasons, investors can buy more units with their SIP sum and vice versa. Since multi cap funds are constantly exposed to market volatility, their NAV is bound to fluctuate from time to time. This allows investors to buy more units in the long run and reduce their cost or purchase and mitigate overall investment risk.
Another big advantage SIP investment have is the power of compounding. In mutual funds, the word compounding refers to the interest earned on the interest earned from the initial investment sum. Over the long term, the compounding effect can turn your small investment sums into a large commendable corpus. Do not underestimate the power of compounding as it can help investors create long term wealth.