Flexibility factor

Multi-cap funds offer superior risk-adjusted returns

Maxie Jose Maxie Jose

MULTI-CAP funds are the largest equity fund category of investor assets, with around Rs1.41 lakh crore of long-term assets under management. Since these funds invest across large-, mid- and small-cap stocks, they provide flexibility to the fund manager to deliver excellent risk-adjusted returns. The construct of these funds makes them an all-weather product for an investor’s portfolio. Since they are highly diversified, they are suitable for all kinds of investors—from a novice to an expert—with a medium- to long-term investment horizon.

With Sebi’s new fund categorisation and classification norms, multi-cap funds are allowed to invest across market capitalisation and sectors, with a bias free product construct. The fund manager can switch holdings in the fund between large-, mid-, and small-cap stocks based on market movements. Their only mandate is to invest a minimum of 65 per cent of their total assets in equity. Such simplicity allows investors as well as fund managers to set the right expectations. When managed efficiently, they have the potential to deliver steady returns across market cycles.

Well-managed multi-cap funds have demonstrated a record of balancing the risk and reward. Over the past 10 years, they have delivered an average 11.6 per cent return (CAGR), with the top-performing funds generating 16-17 per cent. More than 85 lakh investor accounts exist in them, a testimony to investor trust in this product.

Because of the blend across market caps in a single portfolio, multi-caps are a potent investment combination. They deliver great investor experience in terms of stability, something that pure large-cap funds are known to deliver. During the broader market participation, the mid-cap and small-cap components in the funds outperform, allowing the investor to participate in upside while containing downside with large-cap exposure. A case in point is that these funds have currently gravitated towards the relative safety of frontline stocks, but the fund manager could easily manoeuvre the portfolio into higher returning mid/small-caps as markets change. It does not require the investors to make those sells/buys to realign the portfolio, which also makes them more tax efficient in their hands.

So, at all times, irrespective of the market direction, these funds aim to give the investor a consistent performance. Hence, they could become a part of their core portfolio provided they have a moderate risk appetite and time horizon.

As an investor into a multi-cap fund, one must be prepared to remain invested for at least one market cycle. A key attribute is that she must have a highly competent fund manager adopting a time-tested ‘investment approach’ and intensive research. Also, the investing philosophy being fundamental bottom-up analysis and portfolio construction, it should result in a well-diversified portfolio, with no sector, stock, theme, capitalisation or style biases. ICICI Prudential Multicap Fund, for instance, has adopted a combination of top down and bottom up approach for sector and stock selection. The investors trusting this strategy have not been disappointed owing to consistent returns delivered across the market cycles.

Author is with Affluenz Wealth Advisors.