If you are into investing, chances are you have heard the advice 'don't put all your eggs in one basket." But it is worth hearing again and again as the saying holds highly accurate when it comes to investments. There are a lot of factors that contribute to a successful, long term portfolio, but diversification is often the key. A diversified portfolio will help you grow your capital and protect the same in the long term. So let's understand what diversification is and what investment method can help you make a diversified portfolio.
How does diversification help?
A diversified portfolio is one where different securities with different characteristics are present. Such a portfolio will help you maximise your growth potential. For instance, if your portfolio has both equities and debt funds, equities can help you maximise earnings during bearish market periods, and debt can help you grow your money when stock markets lag.
It helps you mitigate the risk associated with your investment as well. For example, in the scenario above, your investments in equities give you an aggressive option to grow your money, but it has a higher risk. But the presence of debt securities can mitigate this by protecting your capital through fixed-income, less risky investments.
How to diversify your portfolio?
There are numerous ways to diversify your portfolio. To begin with, you can manually pick stocks that are diverse and keep a portfolio running. But this needs constant monitoring, and your portfolio needs to be tinkered with regularly. This could become an inconvenience if investing is not your full-time job, especially over extended periods. Consequently, a multicap mutual fund could be a solution for this.
According to the regulations from SEBI, companies in India are divided into three according to their market capitalisation.
- Large-cap companies are well-established and have a significant market capitalisation.
- Mid-cap companies have a smaller market capitalisation than large-cap companies but are still significant.
- Small-cap companies have lesser market capitalisation than the other two categories.
Stocks of companies in each of these market cap groups have different characteristics. For instance, since they are well-established, a large-cap company could have stability in their growth. But, on the contrary, a small-cap company could still be in their growth stages and give your investment much higher capital appreciation. At the same time, since it is still growing, a small-cap company might be riskier to invest. So what's ideal is a portfolio with a perfect mix of stocks of companies of all market sizes. That is where a multicap fund can help you.
Multicap funds have a portfolio with the presence of companies' equities from different capitalisation groups. This can give you a perfect mix of diversification that you aim for in a portfolio. But the benefits of investing in them don't end there. Below are some of the reasons why you should consider multicap funds.
- It gives your investment a better risk and returns potential. As said above, large-cap companies can keep your investment safe while small-cap companies can grow your money.
- Multicap funds are professionally managed. This means you get the best of what the stock markets can offer. The only downside here is that you will be charged a small fee in the form of an expense ratio for the upkeep of the fund.
- Since these funds primarily invest in equities, they are highly liquid.
Multicap funds are a highly beneficial tool for wealth creation. Thanks to its diversity, it can suit a wide range of investors and could be a perfect fit for beginners as well.