Hello friends, welcome to another podcast by Angel One.
Building an investment corpus and long-term term wealth is as lengthy a process as it is important. Smart investment strategies help you generate value against your investment capital. Today we are discussing a strategy that helps you generate long-term wealth. It is known as a multi-cap strategy. We will be learning what it is and how to get started with a multi-cap strategy in 5 simple steps.
In a multi-cap strategy, the investment capital is funnelled towards stocks of large-cap, mid-cap as well as low-cap companies. You may have come across these terms quite often. This categorization is according to the market capitalization (or cap) of a company. The market price of each share multiplied by the total number of outstanding shares of a company is its market cap.
What makes a company large-cap or small cap?
According to the SEBI identification, the largest 100 companies in terms of market capitalization are termed as large-cap. Companies ranking between 101 and 250 are considered mid-cap. From rank 251 onwards, all companies are deemed small-cap.
You might be wondering why market capitalization is so important. Let’s try and understand how they affect your investments.
When it comes to risk, the stocks of large cap companies are the least risky.
This is because large-cap companies are stable and reputable. On the other hand, the stocks of small-cap companies carry significant risk. Often when a market hits a downtrend, the stocks of small-cap companies are the first to be hit. But as they are still small companies, they have the potential to create new value chains. This creates a potential for high returns.
Conversely, as large cap companies are already successful, they are already saturated to some extent when it comes to market growth. Therefore while they don’t provide dramatic short term returns, the returns over years are good as they are the least affected by market volatility. They are also quite liquid and almost always have buyers and sellers for their stocks. This makes them a good option for low-risk investors.
Mid-cap companies are interesting because they are usually expanding and creating market value. Top mid-cap companies, for example, are often on their way to become large-cap. Which is why their yield has the potential of being higher than of small cap. The liquidity is lower than large-cap because of lesser buyers and sellers but again, they are more liquid than small-cap. Mid-cap stocks are most popular amongst investors.
Now that you’re armed with this information, let’s tackle this strategy.
Here are 5 steps to help you build your wealth using a multi-cap strategy:
Balance risk and reward: By having equities with varying risk factors, multi-cap investments let you cap your losses while the window for potential returns is always open.
Choose flexibly: As you are not limited to a sector or instrument, you can choose the stocks you wish to invest in, according to your financial goals and time horizon.
Edit your risk: You can consider investing in small cap funds and stocks if your risk appetite is high and you are looking for a potential high yield rate over a short period. If you have a low or moderate risk tolerance, you can benefit from investing in large-cap companies that will help you generate steady returns.
During market downtrend, invest in sectors that are performing well even during the low period. In such circumstances, investors choose funds and stocks that are mid-cap. This is because, mid-cap companies are affected by such a downturn and are undervalued during the low. They are most often set to do better once the market sees an upswing.
Have patience: Wealth creation is a process that lasts a lifetime. Even seasoned investors take a lot of time to build a strong multi-cap portfolio that generates wealth for them over years. During the process, it is important to monitor the performance of your funds and also reinvest your returns. That way you can use the power of compounding to make the most of your investment.
A consistent and planned approach will allow you to build your wealth. A multi-cap strategy is a great way to diversify your portfolio and give you a good deal of investment exposure.
For more ways to smartly invest your capital and generate long-term wealth, visit www.angelone.in.