Multicap Funds – An All-Weather Strategy to Ride India's Growth Story
Mr. Yogesh Patil
CIO-Equity, LIC Mutual Fund
The last one year was marked by multiple events like rising inflation, changing interest rate stance by central banks globally, rise in global commodity prices led by rise in crude and metal prices, geopolitical tensions etc. Equity markets have remained volatile lately. The benchmark index Nifty 50 at 18,070 on 13th September 2022 gave a return of 4.0% in last one year (Source: Moneycontrol). These are period of volatility. Surprisingly during the same period Nifty 100 performed slightly better than Nifty 50 by generating return of 4.4% while Nifty 500 generating 5.5%. It is evident that a portfolio of well diversified bets may perform better than focused strategy.
What options do Investor have?
Multicap Funds may be a suitable investment option for retail investor with a longer-term horizon of 5 years & above and having a high-risk appetite. Multi-cap funds are open-ended and diversified equity mutual funds that invest in stocks of companies across all market caps in varying economic sectors and industries. Their portfolio comprises a mix of large cap, midcap and small cap stocks(Minimum 25% in Large caps, Mid-caps & small caps).
What are Multi cap funds?
Multi cap funds are mandated by SEBI to keep a minimum threshold of 25 percent in each of the three market capitalizations while the remaining 25% is usually invested in other equity or equity instruments based on the fund managers’ investment philosophy and views. This bodes well for investors who wants to be invested in all the three market caps at all points in time.
How are Multi-cap Funds different from Flexi-cap Funds?
Multi-cap funds are often confused with Flexi-cap funds because of earlier SEBI regulations as well as similar compositions, but they are variedly different in terms of risk and the investors they cater to. In case of multi-cap funds, there is transparency and investors are aware of the amount of risk undertaken because of the minimum limits on market cap. This is ideal for an investor who wishes to stay invested across all classes in the long run. Meanwhile, in the case of flexi-cap funds, there is a very high reliance on the fund manager’s viewswhich means an investor will not be aware of the risk undertaken, as the fund manager can change the allocation between large, mid and small cap stocks to any degree as per their outlook on the market. It is ideal for an investor who seeks highly dynamic fund management.
Where does Multi cap funds fit in the spectrum of Risk & Returns?
By the virtue of its definition, multi-cap fundsinvests in stocks of large-cap, mid-cap, and small-cap companies. Hence, these schemes carry more risk than large-cap schemes while having lower risk than small and mid-cap schemes. However,funds in other categories like large-cap, mid-cap, small-cap are constrained to stick to the particular market capitalisation category.This means that a fund manager of a large-cap fund cannot invest in shares of a small-cap company even if the opportunity is lucrative. This comes as a disadvantage when a particular company is the industry leader in its space but only due to its small scale of operation, falls in small cap category. In case of Multi cap funds however, investors are invested almost equally across all the caps at any given time, so opportunities from all classes can be tapped into.
Investment approach which is a blend of large, mid and small cap stocks is generally considered better, which is exactly in the principles of multi-cap funds. The growth potential of the small caps paired with the scale of large caps along with the moderately positioned mid-caps, may cover most ends of an ideal portfolio.
Hence, multi-cap fundsmay be considered as a relatively better option for wealth creation in a long term as compared to focused categories like large cap funds, Mid cap funds, Large & Midcap funds, small cap funds etc. In Multicap funds, the fund managers can leverage investment opportunities across the spectrum of the market.
What is the benchmark index of Multicap Fund?
All mutual funds are compared with a benchmark to highlight performance relative to the overall category. The benchmarks for multicap funds may be Nifty 500,Multicap 50:25:25 TRI, Nifty 50 TRI or S&P BSE 500 TRI.
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Disclaimer: The views expressed herein are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information / data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risk and uncertainties that could cause actual results, performance, or event to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in the future. LIC Mutual Fund Asset Management Ltd. / LIC Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investment made in the scheme(s). Neither LIC Mutual Fund Asset Management Ltd. and LIC Mutual Fund (the fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipients before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
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