By DK Aggarwal
When it comes to investing, the prime rule to follow is to not put all your eggs in one basket. The rule applies not only equity, but also mutual funds. Before one invests, there is always a dilemma with regard to the category of mutual funds one should invest in.
Currently, mutual funds appear to be the most preferred choice among investors and it is evident from the fact that the number of folio has increase considerably in the past two years. Actually, healthy returns compared with traditional tools of investment have attracted investors towards mutual funds.
In the current stock market, the remaining part of 2018 will be a period when bottom-up stock picking will trump top-down and sector-based investing. In such an environment, multi-cap funds, which enjoy a lot of scope, would be a good bet for retail investors given the flexibility they have in investing across market capitalisation.
Since a multi-cap fund invests across different market-caps, fund manager’s views are significant in determining the fund’s performance. It would be not wrong to say the performance of multi-cap funds depends on the wisdom of the fund manager and the processes followed by the fund house.
Multicap funds begin with an allocation towards each category and then go about picking stocks within each category. To note, largecap funds provide better stability to your portfolio, while midcap and smallcap funds provide exceptionally high returns. Multicap funds can help design and maintain a limited mutual fund portfolio, if investors do not want to take exposure to too many funds.
For sensible diversification, two or three multi-cap funds are good enough to enjoy all the benefits that equity provides. As the long-term outlook for the Indian economy is strong, the stock market is poised to move higher and multi-cap funds are would be better placed to tap these opportunities.
The bottom line is that for most ordinary investors seeking diversification with simplicity, multicap is the way to go. Multicap funds are not a homogenous lot in terms of risk, but one cannot deny the risk, as both midcap and smallcap funds are two of the riskiest classes contained in multicap funds.
To offset such risks, investors should invest periodically across a lengthy duration. An SIP method is an easier way to build wealth over the long term. Through SIP, one can accumulate wealth and benefit from rupee cost averaging across a very long term.
Source: Economic Times