The first investment lesson you will learn is about asset allocation and diversification. While asset allocation is one form of diversity, most investors mistakenly believe that asset allocation and diversification are synonymous.
Yes, both are effective methods for reducing risk and increasing the return potential of an investment portfolio. In practice, however, they are not the same. Diversification is a broader concept that refers to investing in different sub-segments within a single asset class.
While asset allocation is a method of diversifying your portfolio by investing in asset classes, diversification is a broader concept that refers to investing in different sub-segments within a single asset class. Diversification within an asset class is crucial in a portfolio since volatile markets.
What are multi-cap funds?
When the term “Multi-Cap Mutual Funds” is broken down, it reveals its complete meaning. Large-cap, mid-cap, and small-cap firms are all considered multi-cap firms.
Large-cap funds invest in India’s largest companies, mid-cap funds invest in mid-sized organisations, small-cap funds invest in small companies, and a fund category invests in big, small, and mid-sized enterprises.
A multi-cap fund, according to SEBI, has a minimum 25% allocation to large caps, 25% to small caps, and 25% to mid-caps.
They offer many benefits due to their multi-cap structure and should be included in every investor’s portfolio.
Types of multi-cap funds
Although a multi-cap mutual fund provides diversification in and of itself, it also allows investors to choose whatever type of multi-cap fund they wish to participate in.
No specific market capitalization: There is no market capitalization specification in this. The primary goal is to invest in securities that could outperform the market or benchmark.
Mid or Small-Cap focused: The main focus is on mid-cap and small-cap companies, with a larger proportion of wealth invested in these companies. The large-cap companies are there to protect you from any potential losses.
Large-Cap focused: Large-cap companies account for the majority of the fund’s holdings. In this case, the only incentive to invest in mid or small-cap companies is to take advantage of any possibility for higher returns.
Advantages of investing in multi-cap funds
Low Risks
The majority of the best Multi-Cap mutual funds have been recognized to invest mostly in large-cap funds, with just a small percentage in mid-cap or small-cap equities, over the years. Large-cap schemes enable top Multi-Cap Funds to remain steady over time and risk-free for investors to retain.
As a result of this diversification of the investment criterion, the investor’s portfolio has been stabilised, and fewer risks have been assured. This type of portfolio is less risky and more likely to produce higher returns.
Diversification
Multicap funds provide a diversified portfolio by investing in firms of various sizes and sectors. This method of diversification reduces your risk. This is because different industries or market areas can perform differently at any one time, and spreading investments across several sectors keeps risk under control.
Better Flexibility
Multi-Cap Mutual Funds are the best alternative for investors who don’t understand the nuances of individual stock selections or are new to the market. They don’t have the background to understand the differences between large, mid, and small-cap funds, and they have no notion which category will do better in the future.
Risks of investing in multi-cap funds
Because these funds invest in mid and small-cap equities and large-cap firms, they are a bit riskier than large-cap funds. In a healthy economy, a multi-cap fund manager can increase his exposure to mid and small-sized companies to profit from higher earnings.
When the fund manager expects lengthy downturns, they can choose to move client money from mid-cap to large-cap enterprises as a safety net. As a result, this fund category may be volatile.
Multi-cap funds provide a better risk-return trade-off, protecting investors from the downside while also providing upside potential. Investors with a moderate risk aversion and a 5-year investment horizon might consider these ETFs.
Conclusion
Because it is the fund manager’s role to locate and choose the suitable group of stocks across diverse market capitalizations that can promote growth, the performance of Multi-Cap Mutual Funds is heavily reliant on the fund manager’s ideas.
Multi-Cap Mutual Funds make sense for anyone whose investment goal is long-term wealth creation with a moderate risk tolerance but a lack of market awareness. With such a diversified approach and the promise of greater returns, these funds take advantage of every investing opportunity.