Things to Keep in Mind Before Investing in Multicap Funds

Without having a defined set of goals, one should not invest their hard earned money in market linked schemes like mutual funds. Mutual funds hold the potential to offer capital appreciation over the long term, but one should not invest without understanding how they work. An investor’s appetite for risk plays a pivotal role in determining which mutual funds might be more appropriate for them. Mutual funds are a pool of professionally managed funds where the fund manager is responsible for buying / selling securities in quantum with the scheme’s investment objective and risk profile. Every mutual fund scheme has an underlying benchmark which it aims to outperform over the long term.

What are multicap schemes?

Mutual funds like equity funds are categorized based on the market capitalization they target for long term income generation. Small cap funds invest in companies with small market capitalization. Mid cap funds invest in stocks of companies with medium market capitalization. Similarly, multicap funds are open ended schemes that must invest in stocks of companies with small, mid and large market cap.

As per SEBI guidelines, a multicap fund must invest a minimum of 65 percent of its total assets in small, mid and large market cap.

Things to keep in mind before investing in multicap funds

If you are planning on investing in multicap funds, here are a few things to keep in mind:

Keep a long term investment horizon: Multicap schemes are ideal for targeting life’s long term financial goals like building a retirement corpus, securing your child’s financial future, sending them overseas for higher education, or for buying your dream home. Multicaps predominantly invest in company stocks and equity related instruments, making them a high volatile investment. Equity oriented schemes like multicap schemes tend to fluctuate depending on constant market upheavals.  Over the short term, your multicap portfolio might have to bear losses but over the long term, it might help you not only beat market volatility but also overcome inflation. Thus, it is better to keep an investment horizon of at least 5 to 7 years while investing in multicap funds.

Consider starting a SIP: If you wish to accumulate wealth over the long term, then consider starting an SIP in multicap schemes. Systematic Investment Plan or SIP has become so synonymous with mutual fund investing that several individuals misinterpret to be one and the same. SIP is an investment method where an investor can invest small amounts at regular intervals instead of making a one time lump sum investment. Investors can also refer to SIP calculator, a free online tool that can help them get an estimate of the total capital gains they might earn at the end of the investment tenure. All an investor has to do is decide on the monthly amount they are comfortable investing in and also complete all the pre-SIP investment formalities. Following this, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the fund house. Investors can continue investing in multicap schemes via SIP till their investment objective is achieved.

Understand your appetite for risk: Multicap schemes are highly volatile in nature. They do not guarantee capital gains. Investors can even face losses if the scheme isn’t able to sustain during volatile market conditions. Hence, investors must understand their risk appetite and only invest if they can bear losses over the short term.

If you are new to investing in mutual funds, then it is better to consult a financial advisor before investing.