Mutual funds are a pool of professionally managed funds that offer investors a plethora of investment schemes to choose from. Each mutual fund has a different risk profile based on which it makes investment decisions and constructs a rewarding portfolio. Mutual funds collect money from investors sharing a common investment objective and invest this sum across money market instruments and asset classes. Sometimes, the fund manager may not invest the entire investible corpus and may choose to withhold some of the corpora depending on the prevailing market conditions. There are a lot of factors that investors must take into consideration when investing in mutual funds, especially in market-linked schemes like multi-cap funds.
Let us take a look at some of the important things which all investors must consider before investing in multi-cap schemes –
Understand what multi cap funds are
A multi-cap mutual fund is an open-ended equity scheme that builds its portfolio based on stocks of companies belonging to various sectors and industries and across market capitalization. These funds offer true diversification as they invest in all three market caps – large-cap, mid-cap, and small-cap. As per market regulator SEBI guidelines, a multi-cap fund must invest a minimum of 25 percent each in all three asset classes. The remaining 25 percent of the portfolio can be allocated to other debt or equity-related instruments.
Understand the investment objective and risk profile of multi-cap funds
As stated earlier, all multi-cap funds invest across the market cap. That means they also invest in stocks of mid-cap and small-cap companies. This might be alarming to a few investors who do not want to take higher risks. The small-cap market has low liquidity. Since the multi-cap scheme must compulsorily invest 25 percent in small-cap, some investors may not find this as a suitable investment scheme. Also, the investment objective of a multi-cap fund is to generate long-term capital appreciation. This also means that investors with a short or medium-term investment horizon may have to consider other funds like debt or hybrid for their short or medium-term financial goals. Retail investors need to understand the investment objective and risk profile of the multi-cap fund and only invest if it syncs with that of theirs.
What is the expense ratio?
Every mutual fund scheme has an expense ratio which all the investors must pay. This expense ratio is deducted from the investor’s capital gains and hence, in the long run, may affect one’s overall returns if they invest in a scheme with a high expense ratio. Since most equity mutual funds have an expense ratio of 1% and above, investors must ensure that the multi cap scheme in which they are about to invest has a feasible expense ratio.
Consistency in generating returns
Most investors consider investing in a multi cap scheme that has been last year’s top performer. However, this isn’t an ideal way to invest in a mutual fund scheme.Investors must consider investing in a scheme that has consistently delivered in the past 5 years or more rather than settling with last year’s top earner. Understand that not high returns, but earning consistent returns is the ideal way for long term wealth creation.
Multi cap schemes expose a minimum of 75 percent of their portfolio to volatile equity markets. Like all other mutual funds, they do not guarantee returns. Hence, investors must consider diversifying their portfolios across asset classes rather than just depending on one scheme to generate consistent returns throughout their investment journey.
