Retail investors can be divided broadly into two – large-scale and small-scale investors. Large-scale investors are the ones who put a significant amount of money into their investments regularly. Investing could be more than a passive money-making option and rather a part-time for them. But most of the retail investors in India consist of small-scale investors. These include investors who put in a smaller portion of their salary every month in investment options like mutual funds through tools like SIPs. These groups of investors may not be as knowledgeable as large-scale investors, and they mostly look for an easier investment option. That is one reason why many small-scale investors choose multi-cap funds. But what are multi-cap funds, and why are they chosen more? Let us find out.
The need for balance
A balanced portfolio is often the most sought-after quality of an investor. Such a portfolio can ensure that your investment is appreciated and, at the same time, protected. Now, small-scale investors who cannot spend a lot of time perfecting their portfolios regularly will look for easier options to invest in a balanced portfolio. That is where mutual funds come in. They, by default, have a portfolio that is more or less balanced. But different mutual funds will have different characters, and the balance will defer too. For instance, an equity mutual fund will have more equity presence, and the balance will be affected by this too. One reason why multi-cap funds are chosen more could be because they can give you a well-balanced option by default. By how? Let us find out.
Categorization of mutual funds according to market cap
Mutual funds are categorized in multiple ways. Which, one important categorization is based on the market cap of the companies they focus on. Market capitalization, also known as market cap, is the total value of all the shares of a company. It is a dynamic figure and it is calculated by multiplying the number of stocks by the price of each stock. For example, if a company has Rs.1 lakh outstanding shares, the price at Rs.10 at this point, then the market cap of the company is Rs.1 lakh * 10 = Rs.10 lakh.
Large-cap funds are those that invest in large-cap companies. Large-cap companies are comaparitevly a safe investment option. This is because they are huge and have already attained stability. Investing in them tends to give you steady buy lower returns.
Mid-cap funds invest in mid-cap companies mainly. Mid-cap companies are not as large as large-caps but they are still considerably big. Investing in them gives considerably stable returns but there is a higher potential for growth as they may still have space to grow. At the same time, they come with slightly higher risk as well.
All companies that are too small to be included in the above two categories are called small-cap companies. Small-cap funds invest in them. Investing in small-cap funds comes with a higher risk but they have a higher chance for growth as well.
A perfectly balanced portfolio with companies from the above three market cap categorisations is hard to create manually. This is mainly because the characteristics of these companies could change and it could be hard to monitor regularly.
But multi-cap funds are a solution here. They invest in companies of all three market caps to create a good balance. This balanced portfolio should be able to protect and at the same time, appreciate your corpus. This could be the most important reason why more small-scale investors choose multi-cap funds.