Like any other stocks, Multibagger stocks also have investment risks. To reduce the risks, you should not only diversify your investment by including a number of stocks in your portfolio, but also avoid lump sum investment to reduce the market risks.

In the current market scenario, how to look for Multibagger stocks? I have an investible surplus of 20 lakh which I want to invest over the next 3 years.

Instead of a lump sum investment of Rs 20 lakh, you may stagger your investment over 6 months as it is difficult to predict market direction over a short period of time.

Rather than searching for such a stock, an investor should focus on constructing a potential Multibagger portfolio. Ideally, a mix of 20-25 stocks should comprise a Multibagger portfolio, which would help you to avoid the risks of under-diversification and the pitfalls of over-diversification. Based on an investor’s goals and risk appetite, these stocks could be across different market capitalisation and sectors. An investor could construct such a portfolio on the basis of multiple qualitative and quantitative factors, using either a top-down or a bottom-up approach. An investor should also be cognisant about allocation percentage and should preferably allocate between 3 per cent and 7 per cent of the overall portfolio in a single stock.

What kind of returns can be expected?

An investor would also want to focus on generating an alpha of 5 per cent to 10 per cent above Nifty. This means if Nifty delivers a CAGR by 15 per cent over a 3-year period, your portfolio should be able to deliver a CAGR of 20 per cent to 25 per cent over that 3-year period. This is important to understand because there may be a year when Nifty generates a return of -10 per cent and there could be a year when Nifty could grow by more than 50 per cent. For instance, in FY 20-21 Nifty delivered 84 per cent returns whereas in FY 19-20, it delivered -25 per cent.

Between September 2017 and September 2022, Nifty generated an approximate CAGR of 11 per cent. If one is able to generate an alpha of 10 per cent on Nifty’s return over five years, then one can expect a CAGR of 21 per cent over 5 years. This would mean an investment of Rs 20 lakh could transform into Rs 52 lakh during this period.