If you have been looking at equities or equity-related mutual funds India, you might be aware of the term capitalisation. They can broadly determine the size of the company.
So, why is it important to know about it?
Investing in the Indian stock market can be an exciting journey, offering the potential for inflation-beating returns. However, it also comes with its own set of risks.
One of the popular equity investment avenues for Indian investors is mutual funds. These investment products are professionally managed money pools from various investors that “mutually invest”. Mutual funds invest it in a diversified portfolio of securities, such as stocks, bonds, and money market instruments.
Within the realm of mutual funds, multi-cap funds have gained significant traction due to their unique approach, inherent diversification and potential benefits.
Let us learn about market capitalisation and multicap funds investing in India in detail below:
Understanding Market Capitalisation
So, let us start with understanding market capitalisation.
Market capitalisation refers to the total market value of a company’s outstanding shares. In a way, that is an indicative of the financial size of the business. Indian companies can be broadly categorised into the following based on their market capitalisation:
1. Large-cap Companies
These are established and well-recognised companies with a comparatively higher market value. They are generally considered less volatile and might offer relatively stable returns potential. Examples include Reliance Industries, HDFC Bank, TCS and more.
2. Mid-cap Companies
These are companies with a comparatively moderate market capitalisation. These companies are often characterised by faster growth potential compared to large-cap companies. However, they may also exhibit higher volatility and risk. Examples include Bajaj Finance, Kotak Mahindra Bank, Axis Bank and more.
3. Small-cap Companies
These are relatively smaller companies with a lower market capitalisation. They often represent high-growth sectors and have the potential for significant capital appreciation in the long run. However, they might also carry higher risk due to their smaller size and limited track record. Examples include Dixon Technologies, Astral Poly Technik, Alkyl Amines Chemicals and more.
The Birth of Multi-Cap Funds
The Indian equity market is a dynamic landscape, with each segment – large-cap, mid-cap, and small-cap – exhibiting distinct characteristics and performance trends.
Recognising this diversity, fund managers of various AMCs (Asset Management companies) created multi-cap funds.
Multi-cap funds can offer the flexibility to invest across all market capitalisations. These funds can capitalise on growth opportunities in different segments while mitigating the risks associated with any single segment.
Why Invest in Multi-Cap Funds?
Investing in multi-cap funds offers several key advantages:
1. Diversification
By investing across various market capitalisations, multi-cap funds provide diversification benefits. This can help to mitigate the impact of market volatility and reduce overall portfolio risk.
2. Flexibility
Fund managers of multi-cap funds have the freedom to dynamically adjust their portfolio allocations based on market conditions and investment opportunities. This flexibility might allow them to navigate market or business cycles effectively and potentially enhance returns.
3. Exposure to Growth
Multi-cap funds provide exposure to both established large-cap companies and high-growth potential mid-cap and small-cap companies. This dual exposure might potentially lead to higher returns over the long term.
4. Professional Management
Multi-cap funds are managed by seasoned fund managers who conduct in-depth research and analysis to identify promising investment opportunities. This professional expertise can significantly enhance investment outcomes.
Risk Considerations
While multi-cap funds can offer several benefits, it is important to acknowledge the associated risks. The following are the major risks associated with mutli-cap funds investing in India:
1. Market Risk
The performance of multi-cap funds is inherently linked to the overall market conditions. During market downturns, the value of the fund may decline significantly.
2. Credit Risk
There is a risk of default by the companies in which the fund invests. This can impact the fund’s performance and potentially lead to losses for investors.
3. Liquidity Risk
In certain market conditions, it may be difficult to sell the underlying securities held by the fund, which can impact the fund’s ability to meet redemption requests.
Suitability for Investors
Multi-cap funds are generally suitable for investors with a moderate to high-risk appetite and a long-term investment horizon. Investors with a shorter investment horizon or a lower risk tolerance may want to consider other investment options.
Emerging Trends: The Rise of Micro-Cap and Large-Mid-Cap Funds
In recent years, two sub-categories within the equity mutual fund space have gained prominence. These are as follows:
1. Micro-cap Funds
These funds focus on investing in the smallest of companies, often characterised by high growth potential but also significantly higher risk. They are suitable for investors with a very high-risk tolerance and a long-term investment horizon.
2. Large-Mid Cap Funds
These funds primarily invest in large-cap and mid-cap companies, offering a balance between stability and growth potential. They are generally considered less risky than pure multi-cap funds and may be suitable for investors with a moderate risk appetite.
Wrapping Up
Multi-cap funds offer a compelling investment option for Indian investors seeking to diversify their portfolios and potentially enhance their returns. These funds provide exposure to a wide range of companies and sectors by investing across different market capitalisations. These investments in multi-cap funds allow investors to participate in the growth of the Indian economy. However, it is crucial to carefully assess your risk appetite and investment objectives before investing in any multi-cap fund.
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