IDFC Multi Cap Fund NFO review: Should you invest?

After launching its first international scheme in August 2021, IDFC MF is rolling out a multi-cap fund. The new fund offer (NFO) is open from today.

SEBI had redefined the rules for the multi-cap category after observing that such funds were largely large-cap oriented. To avoid disruptions, erstwhile multi-caps were allowed to be reclassified as flexi-caps and in the process a new multi-cap category opened up for mutual funds.

SEBI norms require that multi-cap funds allocate 25 percent each in mid-cap, small-cap and large-cap stocks. The remaining 25 percent can be at the fund manager’s discretion.

However, the IDFC Multi Cap Fund would be run with certain restrictions to mid and small-cap allocations. The allocation to small-cap would be in the range of 25-30 percent and for mid-cap, in the range of 25-35 percent.

The minimum investment to large-caps would be kept higher, at 30 percent.

The fund manager will be allowed to take tactical investment decisions on up to 20 percent of the scheme’s assets. Of this limit, the fund manager can make up to 10 percent allocation to international equity or take a 10 percent cash call.

The scheme aims to give investors a more diversified portfolio across the different market caps -- large-cap, mid-cap and small-caps.

“At different points of time, different market caps tend to do well, like between 2018 and 2019 large-caps did well, and now we are seeing mid and small-caps doing well in the broader market rally. So, it is not easy to increase or reduce allocations perfectly to coincide with changes in market dynamics,” says Vishal Kapoor, chief executive officer of IDFC MF.

“Through a multi-cap fund, investors get a truly diversified equity fund, with adequate exposure across different market caps,” he adds.

The fund also aims to build a portfolio with wider diversification across different sectors. “We are not going to be aggressively overweight or underweight a sector vis-à-vis the index,” adds Daylynn Pinto, fund manager.

IDFC MF’s presentation shows that the Nifty 500 Multi-cap 50:25:25 has outperformed the Nifty 500 in seven of 12 years, giving annualised returns of 13.7 percent over the entire period.

Deepak Chhabria, founder and managing director of Axiom Financial Services, says this fund unique as it has very well-defined and has rigid sub-limits on allocations across different market caps.

The portfolio of IDFC Multi Cap Fund would have a mix of value and growth stocks, even though other funds managed by Pinto have a value and cyclical flavour.

“We will align this fund with the Nifty Multicap Index, which has a 50:50 allocation between cyclical and growth stocks,” Pinto says.

As the fund follows tighter limits, it can underperform other multi-cap schemes that might not stick to such limits.

“While a disciplined approach with well-defined sub-limits could be an advantage in certain phases of the market, there can be periods of underperformance vis-à-vis the category if other multi-caps make higher allocation to certain market caps that do well in that period,” Chhhabria adds.

Ravi Kumar TV, co-founder of Gaining Ground Investment Services, says multi-cap funds may go through periods of higher volatility compared to flexi-cap schemes due to the former’s higher allocations to mid and small-caps.

Pinto points out that the idea behind restricting the mid- and small-cap allocation to 35 percent and 30 percent, respectively, is to keep a check on volatility. As mentioned earlier, the comparatively less volatile large-caps will get higher allocation than SEBI’s requirement.

The portfolio will be rebalanced every quarter to ensure defined allocations.

A multi-cap fund is a good way for you to take a market- wide exposure. To keep a check on the volatility that could come from mid and small-cap allocations, IDFC Multi Cap Fund is restricting investments in lower caps. But, multi-cap is a new category in itself. So, it would be better to first let the scheme build a track-record before committing any investments. The NFO closes on November 26, 2021.