Mutual funds are an ideal investment option for experienced and beginner investors alike. They are designed to make investing easier. Manually investing can turn out to be a lot of hard work. You will need to first do your research to find stocks that work for you, then time the market perfectly to make the most out of your investment. But your job doesn’t end there too. You will then need to monitor the stocks regularly to ensure they are still valid investments. Mutual funds make investing easy, as all the above will be done with the help of an experienced fund manager.
But one of the most sought-after qualities in a mutual fund is a balanced portfolio. While there are multiple options you can choose to achieve this, multi-cap funds are often the most preferred. Let us learn more about multi-cap funds and see why they are a beneficial option.
What are multi-cap funds?
Companies are categorized into three broadly based on their market cap. A market cap is the total value of the shares of the company. It is a dynamic number, and it is calculated by multiplying the total number of outstanding shares of the company by its stock price. For instance, if the stock price of a company is Rs.10 and the number of shares if 10 lakh, then the current market cap of the company is Rs.10 * 10 lakh = Rs.1 core. In real life, the market cap is a much larger figure.
The companies with the largest market cap are classified as large-cap companies. These companies come in the top 100 list in terms of market cap. Large-cap companies have big fundamentals too. They are companies that are being listed for a much longer period. Due to this, they tend to have stable growth. The risk associated with them is also lower comparatively. But at the same time, the growth potential could be lower as well.
Large-cap funds are those mutual funds that primarily invest in large-cap companies. They tend to share the characteristics of large-cap companies.
Mid-cap companies are those that rank between 101-250 in terms of market cap. These companies are large but not as large as the former. Investing in them is a slightly riskier affair, but they tend to have more potential for growth. Most mid-cap companies show stable growth, but they may have diverse characteristics too. For example, companies closer to the 100th rank may have more stability than ones that are closer to the 250th rank.
Mid-cap funds invest primarily in mid-cap companies.
Small-cap companies are all the ones that are not included in the above two categories. They fall below the 250th rank in terms of market cap. They are, as the name suggests, smaller companies, and they show characters of the same. Most of these companies are yet to reach their growth potential and could have smaller stock prices as well. A combination of both can cause higher volatility. Hence. Investing in small-cap companies comes with higher risk yet higher potential for growth.
As mentioned above, different market caps have different advantages. Multi-cap funds try to give you the advantage of investing in all market cap groups through one fund. They invest in large, small, and mid-cap funds alike to create a balanced portfolio.
Investing in multi-cap funds comes with many benefits, including a portfolio balance. Be sure to choose a multi-cap fund after thorough research to ensure you get the best out of your investment.