Multi-cap funds beat market volatility and deliver better returns

Mutual fund multi-cap plans managed to beat market volatility and outperform their benchmark despite investing 25% of the corpus in small-cap funds.

Total assets under management of multi-cap funds increased by 23% in May to ₹54,714 crore from ₹44,516 crore recorded in January. The portfolio of investors in 14 multi-cap funds increased from 25.67 lakh to 33.08 lakh.

Sailesh Raj Bhan, Deputy CIO (Equity Investments), Nippon India MF, said multi-cap funds participate in broader markets across market capitalizations, which broadens the range of stocks for alpha generation.

In addition, it removes the need for excessive timing of market capitalization allocations and reduces the allocation risk that other fund classes might be subject to. While all three categories allow for the creation of alpha, large caps provide the portfolio with a high level of stability.

Quant Active Fund and Mahindra Manulife Multi-cap Badhat Yojana have returned 28% and 20% in three years and 21% and 15% in five years, respectively.

Nippon India Multi-cap Fund, which has assets of ₹11,639 crore, delivered 12% each over the same period. The benchmark Nifty 500 multi-cap yield of 15% and 11%.

Composition of the portfolio

Manish Lodha, Fund Manager (Equities), Mahindra Manulife Mutual Fund, said the post-Covid economic recovery has charted a varied growth trajectory across sectors and companies. The agility in identifying specific areas of recovery and growth, amid the macro trend of formalization and digitalization of the Indian economy, is reflected in the composition of the portfolio.

According to SEBI standards, multi-cap funds must invest 25% each in large-, mid-, and small-cap stocks, while fund managers have the discretion to invest the rest to generate alpha.

This was done two years ago to avoid these funds investing only in large and mid cap stocks and ignoring small cap stocks. The regulator has ensured that these funds remain faithful to their label.

Further, Sebi has separated the top 100 companies by market capitalization into large caps and companies from 101 to 250 have been categorized as mid caps while the remaining stocks have been grouped into small cap companies.

However, many fund companies and investors claimed then that they were compelled to gain exposure to illiquid small cap stocks. Following this, SEBI introduced a new category of Flexi-cap funds which invests in all market capitalizations without any restrictions. Most fund houses have renamed their multi-cap funds to flexi-cap to avoid reorganizing their portfolio.

“Multi-caps are among the best categories for long-term investing because they eliminate investor allocation bias and frequent portfolio changes that reduce returns due to high costs and timing errors. from investors to stock markets through cycles remains a fundamental and standard strategy,” Bhan said.

Published on

July 02, 2022

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