There are several types of investments that are invented by looking at the existence of a diverse range of investors who have different risk profiles. However, the risk profile is categorised into three: high, moderate, low. On the basis of that, mutual funds are categorised as equity oriented, debt oriented and hybrid.
However, besides risk profile, we cannot overlook other aspects of an investment portfolio like high risk with minimum risk, diversified portfolio with an opportunity to give as high return as possible. Some investors are often willing to take risk if returns are proportionately higher. Such a diversification makes a mutual fund company create a differentiation between each other. Multi-cap funds are those funds which are made with the intention of the same.
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What are multi-cap funds?
A multi cap fund is a fund in which fund managers invest in the companies having different market capitalisations. It works similarly as other mutual funds as they pool money from various investors and invest in pre-decided diversification as per the scheme selected by the investors. However, such a selection is totally based on the risk profile and return requirements of the investors.
A multi-cap fund invests in the stocks of medium, small, and large cap companies proportionately. The Securities and Exchange Board of India (Sebi) provided rules on what the minimum investment should be in each market category in a circular on September 11, 2020.
The regulator mandated that equities and products with an equity-related focus should make up 75% of a multi-cap mutual fund's total investment. This cap is further separated based on market capitalization. Fund houses are advised to invest at least 25% of their total assets in each of the market segments—large-cap, mid-cap, and small-cap companies.
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How to know that multi cap funds are for you?
Here are a few signs that say multi cap investing is for you.
New equity investor
As a new equity investor, you must not be willing to take much risk. Multi cap funds provide a well-diversified portfolio in the equity segment only so that your risk can be reduced to the minimum and returns maximise.
If you are confused between where to invest, whether to go for large, medium, or small cap stocks, you can invest in multi cap funds which invest a particular portion of your money in each type of stocks.
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Long term investors
If you are looking for long term investments, multi cap investment gives you a better exposure to grow your money at a significant growth rate. Right selection of small and mid cap stocks are volatile and risky enough to invest but when they turn themselves from small cap to mid cap or from mid cap to large cap, the stocks could act as a wealth creation equipment for you.
Investing in the stock market could be risky, but you can reduce your risk by taking a different route than buying equity shares directly. Investing in different market capitalisation through multi cap funds could be an easier and smarter way of increasing your returns and capital appreciation in the long run.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com