As individuals, we are giving our 100% day in day out at the office so that in the near future, we are able to improve our existing financial condition. However, we cannot entirely depend on our savings to become rich as inflation tends to depreciate the current value over the long term. This is exactly why financial advisors recommend investors spread their investments across various asset classes, thus investing their savings rather than letting them sit idle.
Retail investors are constantly looking for various investment options to diversify their portfolios. Although mutual funds offer the diversification, they are confined to a specific market class based on their asset allocation. For example, a large cap fund must invest a minimum of 80 percent of its investible corpus in large cap company stocks. The same applies to mid cap and small cap funds that must hold maximum exposure to mid and small cap markets respectively.
If you wish to invest in an equity scheme that invests across market capitalization, you may consider investing in a multi cap fund.
What is a multi cap fund?
A multi cap fund is an open ended equity scheme that invests in mid cap, small cap, and large cap company stocks. As per market regulator SEBI (SECURITIES AND EXCHANGE BOARD OF INDIA), of its total assets a multi cap fund must have a minimum exposure of 25 percent each to mid cap, large cap as well as small cap stocks. Since a minimum of 75 percent of its overall portfolio is exposed to market volatility, multi cap funds are known to have very high investment risk.
Multi caps do not have a lock in
Unlike some equity funds like Equity Linked Savings Scheme (ELSS) which comes with a predetermined lock in of three years, multi cap funds do not have any such lock in. Investors are free to redeem their fund units at any given time. Investors can either choose to withdraw their entire investment sum or only redeem a few units and allow the remaining of the sum to accrue interest. However, if you redeem your multi cap units before 12 months from the date of the first investment, you will be eligible for short term capital gains tax. Any gains redeemed after 12 months exceeding Rs. 1 lakh are eligible for longer capital gains tax which stands at 10 percent.
One can invest in multi caps via SIP and lump sum
If you have a large capital parked that is a little idle, you can make a lumpsum investment and buy more units at the current NAV. On the other hand, those who wish to benefit from changing market cycles and do not wish to expose their entire investment sum right at the beginning of the investment cycle can consider opting for the Systematic Investment Plan (SIP). ASIP is probably the simplest way to create long term wealth with a multi cap fund. All you have to do is decide a sum and date of every month in which you want to invest this sum. After this, if you automate your SIP transactions, every month a fixed sum will be debited from your savings account and you can buy units as per the existing NAV. Since markets fluctuate from time to time, so does the NAV and in the long run, investors might be able to buy more units and reduce their total cost of purchase.
Investors can even use the online SIP calculator to compute the total returns that they might earn at the end of their SIP journey.