Wondering about investing in either small cap funds or multi cap funds? You will do well to realize that this is not a conventional either-or scenario. You should first endeavor to know more about both these categories and then invest as per your own specific goals, risk appetite and other parameters. Let us first take a closer look at multi cap funds. These are more flexible types of funds that invest in buying stocks of entities with varying market capitalizations. They are basically diversified equity funds and investments are done in differing proportions for meeting investment related objectives/goals. These funds have majorly performed well over the last few years. Some of them have outstripped the average returns from the market by a sizable margin as well. While fund returns are being mapped, benchmark is a term that is often used. This is a market index in layman’s language, such as the CNX Nifty and BSE Sensex.
Funds in other segments like a small cap fund, mid cap fund or large cap fund, will have limitations and will majorly stick to entities defined through their portfolios. A large cap fund for instance cannot invest in small and mid cap stocks for example. The same principle applies to all these categories. However, multi cap funds are bereft of such restrictions and may benefit investors more in the long haul. They may help in tapping investments opportunities flexibly, creating more wealth over the years. Returns may be somewhat comparable to those from mid cap funds over a longer period. Hence, volatility is lessened to an extent.
Those with moderate risk levels may consider these plans for creating long-term wealth. These funds may offer better returns than large cap at times although the returns may be lower than mid or small cap funds. It should be mentioned that these funds have higher risk levels than large cap funds. This is because fund managers in volatile environments may look to scale up exposure to mid and small cap funds for higher earnings.
You should now learn about small cap funds which invest in small cap entities with market capitalization lower than Rs. 5,000 crore. These companies are comparatively smaller in size with ample growth potential. Stocks of these companies are relatively volatile and entities in this segment have often gone on to hit the big time while some have bitten the dust as well. Whenever the economy comes out of a slump, a small cap fund usually gives returns surpassing the market as seen historically. The funds have higher risk exposure and whenever a small cap entity performs well, there is ample scope for future growth. The returns may be comparatively higher than all other funds owing to the higher level of risk involved. Those with adequate risk appetite and an aggressive investment strategy should consider small cap funds. Those looking for a more diversified, slightly less risky (and slightly low return) investments should consider multi cap funds.