Why SIP can be a Smart Way to Invest in Multi-Cap Mutual Funds?

Multi-cap funds are open-ended mutual fund schemes that invest at least 75% of their total assets in equity and equity-related instruments. As per SEBI’s regulations, the asset allocation of a multi-cap fund must broadly follow this structure:

Investment in equity & equity related instruments:

• At least 25% of total assets in large-cap stocks

• At least 25% of total assets in mid-cap stocks

• At least 25% of total assets in small-cap stocks

• Remaining 25% can be invested in equities across market caps or in debt/money market instruments

The multi-cap fund manager has the discretion to decide where the remaining 25% of the scheme is invested. By spreading investments across market caps, multi-cap MF schemes aim to benefit from broad-based growth across the market while potentially reducing risk through diversification in equity investments.

Here’s why you may consider multi-cap funds:
 

An SIP or Systematic Investment Plan is an investment route that allows you to make fixed contributions into a mutual fund scheme at regular intervals (on a monthly, weekly, or quarterly basis), rather than investing a lump sum amount. 

With SIPs, your investment contributions continue regardless of market conditions and may help to create potential long-term wealth through rupee cost averaging and the power of compounding. 

• Foster discipline and consistency: SIPs can help investors build a disciplined investment habit. With SIPs being auto-debited from your account every month, you may avoid the urge to time the market.

• May reduce market entry risk: SIPs allow you to invest in a multi-cap mutual fund across different market levels, which may help reduce the impact of timing the market.

• Rupee cost averaging: With SIPs, investors contribute a fixed sum at regular intervals. So, when markets are high, fewer units may be purchased,, and when markets are low, more units may be purchased; averaging investment costs over time.

   

Here’s why SIPs naturally suit multi-cap fund investments: 

1. May Help Manage Volatility

Multi-cap MF schemes may experience high market volatility due to exposure to small and mid-cap stocks. But SIPs may help mitigate some of this volatility’s impact on one’s portfolio. 

Your SIP may purchase more units of the fund when markets are low and fewer when markets are high, averaging the per unit cost over time. So, SIPs let you participate in both market ups and downs, allowing investors to participate across different market phases.
 

2. Encourage Disciplined Investing

Lump-sum investments in multi-cap funds may be better suited when markets aren’t overvalued. However, identifying such opportunities may require investors to assess market conditions and attempt to time their investments. SIPs, on the other hand, allow investors to invest regularly without focusing on market timing. With SIPs in multi-cap funds, you don’t have to worry about picking the right time to enter the market. Instead, you can invest a fixed amount of money in a disciplined way. Moreover, you can also avoid making emotional decisions based on short-term volatility because you remain focused on long-term goals and know that SIP can handle short-term ups and downs if you stay invested for the long-run.
 

3. Make Starting Small Possible

Making a lump sum investment in a multi-cap fund involves investing a larger amount at one time. Many multi-cap funds require a minimum lump sum investment of Rs. 5,000, which may feel like a bigger commitment for some investors, especially those who have just started working. 

SIPs provide another way to invest in multi-cap funds by allowing investors to contribute smaller amounts at regular intervals, sometimes starting from ₹500. This smaller contribution option can make it easier for beginners, small investors, or those managing multiple financial commitments to begin investing.
 

4. Make Investing Easy for Beginners

Beginners entering the mutual fund space may often find the starting process overwhelming. SIPs in multi-cap funds can help beginners get started without worrying about timing the market. 

Moreover, beginners can even pause or stop SIPs, depending on their financial situation. So, with SIPs in multi-cap funds, beginners can start with a small amount, manage volatility through rupee-cost averaging, and potentially build wealth over time through compounding.
 

5. May Align Better With Regular Cash Flows

If you are a salaried employee, investing in multi-cap funds through SIPs may simply align better with your cash flows. With regular monthly income coming in, you may be in a position to contribute small, fixed amounts over the years, rather than investing a lumpsum.

Before setting up an SIP in a multi-cap fund, here’s what you should keep in mind:
 

Market Volatility Risks

Multi-cap MF schemes invest a total of 50% (25%+25%) in small and mid-cap stocks, which tend to experience higher volatility during market fluctuations. So, while multi-cap funds are diversified, they are still equity-oriented schemes that may experience sharper falls during market downturns as compared to pure large-cap funds. That’s why you have to think about how much risk you’re willing to take on. They may be better for investors with a moderate to high risk appetite.
 

Flexibility Concerns

Now, multicap fund can invest in large, mid, and small-cap stocks, but the minimum investment limit for each market cap is defined by SEBI. This is unlike flexi-cap funds that can invest in any market cap without minimum limits and where the fund manager can flexibly allocate based on market conditions. 

The rule for minimum allocation limits the flexibility of a multi-cap fund manager to a certain extent. Even if they switch allocations between market caps based on outlook to capture opportunities when markets change, they have to maintain the minimum thresholds. This may lead to missed market opportunities in some cases.
 

Time Horizon

Equity markets tend to move in cycles and perform better over the long-run. Since multi-cap funds are also equity-oriented schemes, they too need a long-term horizon to show any potential results. Moreover, SIPs also take time to show the benefits of rupee cost averaging. 

This means you need to evaluate your investment horizon. If you have a long-term horizon that allows you to stay invested for 5-7 years, you may consider investing in multi-cap funds through SIPs.

To answer this question, you have to ask yourself these two questions:

• Do multi-cap funds suit my portfolio, risk profile, and time horizon?

• Do I want to invest through SIPs?
   

You’ll know what to do once you answer them. That said, here’s a list of investors who may find multi-cap SIPs suitable:

• Salaried investors or those with regular cash flows

• Investors who wish to start small

• Investors with a moderate to high risk appetite

• Investors looking to diversify their equity investments with a single fund

• Investors with a long-term horizon

• Beginner investors looking to invest in a well-diversified equity fund with a nominal sum

In summation, multi-cap funds are equity-oriented schemes that invest across large, mid, and small-cap stocks with at least 25% allocation in each. Since these are equity schemes and prone to volatility, investing through SIPs may be one approach investors can consider.. SIPs help:

• Encourage disciplined investing

• Handle volatility through rupee cost averaging

• Stay consistent and avoid market timing urges

But even when starting SIPs in multi-cap funds, you should review your risk profile, time horizon, and the fund’s performance carefully. 
 

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