HDFC Multi Cap Fund NFO review: Should you invest in the scheme?

Representative Image

After years spent in being selective while launching fresh schemes, HDFC Mutual Fund has filed applications for rolling out several new ones and has already launched a few this year. HDFC Multi Cap Fund (HMCF) is set to be launched today.

What is the scheme about?

As the name suggests, the scheme will buy shares of companies across market capitalisation. Mutual funds have been launching multicap schemes to fill the void in this product category. SEBI revised its rules for the multi-cap funds last year. According to SEBI norms, multi-cap funds must allocate 25 percent of their assets each in mid-cap, small-cap and large-cap stocks. The remaining 25 percent may be invested at the fund manager’s discretion.

Gopal Agrawal will be the fund manager of this scheme. Agarwal comes with a good track record, having worked at Mirae Asset Global Investments (India) earlier for 10 years. HMCF is the third multicap fund to be launched so far this year.

What works
Earlier, many multi-cap funds held more of large-cap stocks than mid and small caps. So, SEBI created a flexi-cap category. Most of the erstwhile multi-cap funds moved to this new category and continued to have a greater flexibility in investing.

The multi-cap fund will be benchmarked against the NIFTY 500 Multicap 50:25:25 Index, which has 50 percent weight to large-caps, and 25 percent each to mid and small-caps. Investors looking for a blended portfolio are better suited to invest in multi-cap funds.

At present, Agrawal finds mid-caps expensively valued, while small and large-caps are relatively reasonably valued.

Still, multi-cap fund managers have some flexibility. They can shift their allocations depending upon their market outlook, as well as interpretation of the overall economic environment. For example, smaller-sized companies tend to do well when interest rates are on the lower side. If the fund manager sees sector opportunities, he might go overweight on that segment.

But Agrawal says he would do this only if he is really convinced about the prospects of the sector. “A very large underweight compared to the benchmark index may lead to possible underperformance, and a very large overweight could lead to higher risks. We will not go beyond a pre-determined limit for sector weightages. A sector’s fundamentals can change even overnight,” he adds.

In certain industries, the market leaders are mid and small-cap companies.

What doesn’tRupesh Nagda, founder and managing director of Family First Capital, says it is important that investors come with a long-term view as multi-cap funds may go through periods of higher volatility. The impact of market-linked volatility tends to even out over the long term.

“Multicap funds are higher on the risk-return profile compared to flexicap and large & midcap schemes,” Nagda points out.

Nagda adds that if investors already have a well-diversified portfolio of large, mid and small-cap funds, then getting into a multicap fund doesn’t make sense.

Some financial advisors prefer flexicap funds, as there are no minimum investment limits based on market caps and the fund manager is allowed to completely exit from mid and small-caps if she feels the valuations are getting frothy.

Also read: MC30: A sparkling list of the 30 best mutual funds from key categories

Moneycontrol’s take

A multicap fund could give investors a well-diversified equity portfolio. With more fund houses planning to launch multicap schemes, financial planners say the differentiation would be the fund manager’s ability to deliver performance in this category. While Agrawal comes with a good track-record, the multicap category is itself a new one. So, it would be better to let the fund build a track-record before considering it for your long-term investments.