Thanks to categorization of mutual funds by market regulator SEBI (Securities and Exchange of India), it is easy for investors to navigate through a wide array of schemes before making an investment decision. Mutual funds have been further categorized based on certain unique attributes like investment objective, risk profile, asset allocation strategy, etc. Depending on the nature of the scheme and its investment objective, a mutual fund may invest across various asset classes and money market instruments likecompany stocks, equity, debt, call money, government securities, certificate of deposits, etc.
What are multi cap funds?
In SEBI’s own words –In orderto ensure uniformity in respect of the investment universe forequity schemes, it has been decided to define large cap, mid cap and small capas follows –
Large Cap Funds:1st-100thcompany in terms of full market capitalization
Mid Cap Funds:101st-250thcompany in terms of full market capitalization
Small Cap Funds:251stcompany onwards in terms of full market capitalization
Multi Cap Funds follow a unique investment strategy where they aim at generating capital appreciation my investing across company stocks of different market capitalization. A multi cap funds invests in stocks of large cap, mid cap, as well as small cap companies.
Should investors target their long term financial goals with multi cap funds?
Multi cap funds offer the option of SIP investments: Systematic Investment Plan, abbreviated as SIP, is a way to invest in multi cap funds. The beauty of SIP investments is that you can invest with a monthly SIP amount of Rs. 500 per month. When you start a mutual fund SIP, every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to the fund. This way of investing is ideal for achieving life’s long term financial goals like booking a weekend home by the countryside, surprising your daughter by giving her a destination wedding, or building a retirement corpus for your sunset years.
If you start an SIP in multi cap funds via SIP,over the long term, your investments benefiting from the power of compounding. In mutual funds, compounding refers to interest earned on interest earned from the principal investment amount. Although you invest small amounts at regular intervals, thanks to compounding, you might be able accumulate wealth in the long run.Benefiting from compounding might not be possible for investors with a short term investment horizon. Historically, power of compounding has only shown its true potential to SIP investors who continued investing for a minimum period of seven to ten years. If you are new to investing and wish to inculcate the discipline of regular investing, then you can consider starting a SIP in multi cap funds. One can even refer to an online SIP calculator in order to understand how much money you need to invest at regular intervals in order to achieve
Things to keep in mind before investing in Multi cap funds
Do remember that thanks to mutual fund categorization by SEBI, investors can now compare the performance of schemes that fall under one umbrella. If you want to invest in a multi cap fund, you can first compare several multi cap schemes before narrowing down to one. Although it is true that investors should avoid solely investing in a scheme based on its past performance, a consistent performing multi cap fund is generally owned by a reputed fund managements that hosts an elite staff of fund managers, researchers and analysts. Also, the expense ratio of the scheme should be feasible for investors to afford.
Also, feel free to consult a financial advisor to understand the importance of multi cap schemes in your investment portfolio.