Are multi-cap funds better than flexi-cap funds? Find out which one is for you The meatier exposure to broader segments of mid caps and small caps makes a lot of difference. Multi-cap funds are emerging as a superior alternative for those seeking broader diversification. Should you invest in mid-cup funds?
Three years ago, Sebi created a separate category for multi-cap funds. While these are similar to flexi-cap funds in that both invest across the market-cap spectrum, the key difference is in the relative exposure to large-cap, mid-cap and smallcap stocks. To ensure a ‘true to label’ positioning, multi-cap funds were required to park a minimum 25% of the corpus in each of the three market-cap segments. This was deemed necessary after several multi-cap funds in their earlier avatar (now termed flexi-cap) were found to run a distinct large-cap bias. Instead of forcing them to change their ways, these funds were allowed to run under the ‘flexi-cap’ banner.Naturally, chaos ensued. Most of the erstwhile multi-cap funds found it easier to reposition as flexi caps than to meet the new rigid norms. Meanwhile, a handful of funds opted to remain ‘multi cap’ as these were already running a more diversified approach. Not surprisingly, after carving out two separate categories, asset managers have been busy launching new fund offers (NFO) to fill product gaps created by the repositioning. AMCs have mostly been launching funds in the space left vacant in the multi-cap category, with seven new funds hitting the market this year. Has anything good come out of this? Experts reckon the structure of multi caps gives them a sizing edge over flexi caps. The meatier exposure to broader segments of mid caps and small caps makes a lot of difference. The data for 31 August shows flexi-cap funds holding 61% of assets in large caps, 18% in mid caps, and 13% in small caps.
Multi-cap funds offer diversification across all market-cap segments
Flexi-cap funds are biased towards large caps, similar to their index.
Meanwhile, multi-cap funds parked 37% in large caps, and 27% each in the other two segments. Juzer Gabajiwala, Director, Ventura Securities, remarks, “All funds in the flexi-cap category tend to hug large caps, irrespective of the market conditions, which defeats the very premise of the category. You end up betting heavily on large caps.” One reason for this is that the benchmark index for flexi-cap funds itself has a large-cap bias. The Nifty 500 index currently allocates 75% to large caps. Niranjan Avasthi, Head, Product, Marketing and Digital, Edelweiss AMC, whose multi-cap NFO is currently active, observes, “Taking market-cap related calls in flexi-cap funds is difficult given the benchmark positioning.
Besides, fund managers find it a risky proposition to take active bets at all three levels—stock, sector and market cap.” With sizeable presence in mid and small caps, multi-cap funds afford true all-cap exposure. This lends more firepower to the portfolio under the right conditions. In a rising market, mid and small caps tend to sharply outperform large caps. Between October 2019 and December 2021, mid and small caps soared 29% and 31%, respectively, while large caps gained 17%. This can also help deliver outperformance over the benchmark index. Flexi-cap funds, on the other hand, have been stymied by the heavy presence of large-cap stocks.
Better outcomes are more likely
Higher presence in mid and small caps gives multi-cap funds an edge.
NOTE: Benchmark of multi-cap category is Nifty 500 Multicap 50:25:25 Index TRI; benchmark of flexi-cap category is Nifty 500 TRI. Data as on 31 July 2023. Source: Edelweiss AMCExperts insist that the utility of flexi caps has moderated. In fact, these are more suited to those seeking large-cap exposure. Multi-cap funds are emerging as a superior alternative for those seeking broader diversification. “Normally, a flexi-cap fund would be the ideal pick as its inbuilt flexibility would help it to perform better than multicap funds. However, the reality is different,” asserts Gabajiwala. “I would suggest a multi-cap fund even if it comes with higher volatility as long as investors extend their holding time horizon,” he adds. Besides, instead of investing separately in various market-cap funds, a single multi-cap fund can provide the diversification you need, reckons Avasthi. “Multi-cap funds allow for disciplined allocation. The exposure to each market-cap segment is rebalanced automatically without any tax incidence for the investor.”
The downside is that investors are signing up for a higher risk profile with multicap funds. If the market conditions are not conducive, a higher exposure to mid and small caps may cause bigger drawdowns. Between January 2018 and October 2019, when the market was in a narrow range, mid and small caps shrunk by 7% and 19%, respectively, even as large caps gained 5%. A large- and mid-cap fund will provide enough incremental diversification at lower risk compared to a multi-cap fund.
Check your existing allocation before betting heavily on multi caps. If you have sufficient exposure to mid and small caps, skip this category. Don’t add a multi-cap fund to the existing mix of a large- and mid-cap, small-cap and flexi-cap funds. Don’t hoard funds across categories. Keep your portfolio simple and compact. If you are keen, ascertain whether the fund house has execution capabilities across the market-cap buckets. Apart from a few, long-running multi-cap funds, most are newer schemes still building a track record. Stick to proven offerings till these provide evidence of their capabilities.
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This story originally appeared on: India Times - Author:Faqs of Insurances
