A well-balanced and diversified portfolio is necessary for success in equity investments, whether you are investing directly or through mutual funds. Such a portfolio will help your investment gain profits while keeping it safe at the same time.
One way to diversify your equity investments is through investing in companies of different sizes. This is because while larger companies can give your investment stability and help you keep it safe, investments in smaller companies can help grow your money. Let us understand diversification better and figure out the best investment plan for every investor.
Market capitalisation is the scale
if you want to pick companies of different sizes, market capitalisation is the perfect scale for the job. Market capitalisation or market cap is the total monetary value of the company based on stock price and the total number of outstanding stocks the company has. Companies are divided into three based on this. Large-cap companies are those with a market cap of over Rs.20,000 crore. These companies are well established, and they tend to have a steady growth pattern. That makes investing in them a safe bet.
At the same time, mid-cap companies have a market cap between Rs.5000 crore and Rs.20,000 crore. They are big companies but not as big as large-cap ones. That means there could be still space for aggressive growth. The same makes investing in them riskier as well.
Lastly, small-cap companies have a market cap below Rs.5000 crore. These are companies that are yet to reach their threshold, which makes investing in them a risky affair. At the same time, this factor gives investments in small-cap funds the biggest potential for growth.
Investing indirectly vs through mutual funds
Since companies of different market caps have different characteristics, a well-balanced mix can help you make a diverse portfolio with elements that complement each other. For instance, if you have both large-cap and small-cap companies’ stocks in your portfolio, large-cap stocks will help you keep your capital safe even in a time of volatility. At the same time, small -caps companies will keep your investment’s growth up when markets are bullish.
There are two main ways you can create a diversified portfolio here. Either you can invest manually, or you can choose to invest in a mutual fund. While investing manually can be fruitful as well, it could take up a lot of your time it demands constant monitoring. Hence, investing in mutual funds could be the better choice.
Multi-cap funds are often the go-to choice when it comes to investing in companies of different market caps. These funds have the presence of at least two market cap groups in their portfolio, making them a diverse choice. Within multi-cap funds, too, you have choices to pick something that matches your investment horizon. For instance, if you are an aggressive investor, you could choose a fund that invests more in small and mid-cap funds. These securities have the most growth potential but with similar risks.
On the other hand, if you are a conservative investor, you could choose a fund that represents large-cap stocks more. Since most of these stocks are of well-established companies, they tend to handle bearish periods well. But their growth potential is less compared to the other companies.
The choice here boils down to one factor primarily- your investment horizon. Investments made according to your goals and risk appetite often work best for you. If you are a new investor, it is highly recommended you take the help of a financial expert before making your choice. They will help you understand your horizon and make better investment decisions.