Mutual funds have become an important investment tool, thanks to a lot of initiatives and investor awareness campaigns carried out by AMFI (Association of Mutual Funds in India) and other Asset Management Companies. One of the best ways to mitigate risk and earn long term capital appreciation is by investing in market linked schemes like equity mutual funds.
Equity mutual funds can be categorized as on the market capitalization they target to pick stocks and form their portfolio. While schemes like large cap, small cap, and mid cap invest predominantly, in large, small, and mid cap stocks respectively to generate capital appreciation, schemes like flexi cap funds and multi cap funds invest across market capitalization. Today we are going to discuss multi cap funds, how they are different from flexi cap funds and how these funds work.
What are multi cap funds?
Multi cap funds are open ended equity schemes that invest in large cap, mid cap, and small cap stocks to build a portfolio of stocks that have the potential to generate capital appreciation over the long run. As per market regulator SEBI (Securities and Exchange Board of India) guidelines, of its total assets, a multi cap fund must invest a minimum of 25 percent each in small cap, mid cap, and large stocks. The manager may choose to invest the remaining of the assets in debt or other equity related instruments based on the nature and investment objective of the scheme.
How do multi cap funds work?
As mentioned earlier, multi cap funds invest the majority of their investible corpus across the market cap. The fund manager tries to generate capital appreciation by building a portfolio of credible stocks belonging to large cap, mid cap as well as small cap companies. The fund tries to balance its overall portfolio by giving itself stability through bluechip stocks. The small cap and mid cap components of multi cap funds try to generate risk-adjusted returns.
What are the different investment plans to invest in multi cap funds?
There are two ways in which retail investors can consider investing in multi cap funds – they can either make a one-time lumpsum investment right at the beginning of their investment cycle or they can consider opting for the Systematic Investment Plan. Those who have surplus capital that is sitting ideal may consider making a lumpsum investment. However, most young, as well as seasoned investors these days, are considering SIP over lumpsum. Systematic Investment Plan (SIP) is a simple and effective way to save and invest a fixed sum regularly in mutual fund schemes like multi cap funds.
The greatest advantage of starting a monthly SIP is that investors can invest the minimum investment sum stated in the multi cap fund’s SID (Scheme Information Document). This minimum investment sum can be anywhere between Rs 500 to Rs 1000. Yes, by investing such a small every month investors can invest in multi cap funds. Also, depending on how the scheme performs they may choose to increase their investment sum so that they are able to increase their corpus in the long run. Investors can even use an online SIP calculator to compute the total estimated returns which the multi cap scheme may be able to offer if they continue to invest in it via SIP for a certain duration. The two biggest advantages of SIPs are the power of compounding and rupee cost averaging. To add to that, investors can stop their SIP investments at any given time and do not have to pay any fine or penalty for doing so.
Investors must consult their financial advisor before investing in any market linked scheme.