One of the oldest and most timeless diktats of investment is diversification. Diversifying one’s portfolio across various asset classes is wise if you want to reduce the risk exposure and explore different wealth creation avenues to their fullest potential. The same rationale applies to mutual funds as well.
There are several categories of mutual funds that you can invest in, but how do you know which one’s the most suitable for your goals? Below, we discuss how multi-cap funds might be ideal if one of your goals is to have a diverse financial portfolio.
What are multi-cap funds?
Equity mutual funds invest your money mainly in stocks and equity-related instruments. These stocks are classified by the market capitalizations they represent. For instance, small and mid-cap funds represent companies with a market cap of less than Rs. 20,000 crore. On the other hand, large-cap funds invest in well-established businesses that have the lion’s share of the market capitalization at Rs. 20,000 crore or more.
So, where does that leave multi-cap mutual funds? Well, when you don’t want to park your money in any one kind of market capitalization and would rather take advantage of the features offered by all three, you can invest in multi-cap funds. The fund manager is obligated to allocate a minimum of 75 percent of your corpus to equity. Within that, the breakdown among small, mid, and large-cap stocks is 25 percent each.
With your funds varied among different capitalizations, multi-cap mutual funds are able to grow wealth as well as add value to your portfolio. They adapt to market fluctuations and are therefore less volatile than small or large-cap funds.
Who should Invest in multi-cap equity mutual funds?
Each of these classes is suitable for different purposes and types of investors. If you expect high returns at a medium or high-risk capacity, top-rated small and mid-cap funds might be a good place to invest. These funds are better suited for long-term investments as they have the potential to grow.
Large-cap funds might be more appropriate for those in the mid-age groups who prefer some stability and security in their investments. These funds have been known to generate higher returns than debt funds and offer stable returns even when the market is volatile because of how reliable the underlying stock is. They have a lower risk profile and are generally more attractive for those nearing retirement, where the motive is to protect your capital.
When it comes to multi-cap funds, the investor profile can be much wider. Let’s say you want to invest in equity funds without the high risks associated with the market. You are not totally averse to risks but want a safety net for long-term wealth creation. In such scenarios, a fund manager would recommend multi-cap mutual funds.
To sum up
Consider investing in multi-cap funds when you aren’t particularly inclined towards any one type of fund. However, make sure the fund manager has performed well in the past and is rated highly. You can use the Tata Capital Moneyfy App to compare different funds with the click of a button and start investing in the one that suits your needs.