LIC Multi-cap Fund opens today: Should you invest?

LIC Mutual Fund has announced the launch of the new fund offer (NFO) for LIC Multi-Cap Fund (LMCF), the second scheme from the fund house in CY22. Earlier this year it launched a money market fund. Both these launches are aimed at completing the product bouquet.

LMCF is an open-ended scheme that will invest in equities and equity-related securities. The scheme, as per the scheme categorisation guidelines issued by market regulator Securities and Exchange Board of India (SEBI), will invest 25 percent of the corpus in large-, mid- and small-cap stocks. The remaining 25 percent will be invested as per the fund manager’s discretion. The fund will be benchmarked against the Nifty 500 Multicap 50:25:25 Total Return Index.

LIC Mutual Fund’s chief investment officer Yogesh Patil will be managing this fund.

The stated investment strategy is to determine and buy shares of companies that may emerge as winners in their respective sectors. The fund manager will identify industry leaders across market caps having strong moats and scalable businesses and invest in such shares with a view to generate long-term capital appreciation.

As per the regulatory norms, the scheme will have exposure to large-, mid- and small-cap stocks. This ensures that the scheme can offer relatively better returns compared to flexi-cap schemes when the broader market is in a bull phase and small- and mid-cap stocks are doing well.

Multi-cap funds gave 0.4 percent returns in the year to October 3, 2022 compared to flexi-cap funds’ loss of 2.4 percent over the same period, as per ACE MF.

As on August 31, 2022, multi-cap funds allocated 42 percent, 27 percent and 26 percent of their funds to large-, mid- and small-cap stocks, respectively. For flexi-cap funds, these numbers stand at 65 percent, 18 percent and 11 percent. Put simply, investors keen on exposure to mid- and small-cap stocks are better off with multi-cap funds.

Amol Joshi, founder of Mumbai-based Plan Rupee Investment Services, says, “Since multi-cap schemes invest minimum 25 percent each in large-, mid- and small-cap stocks, they can be an ideal candidate for the equity portfolio, especially for those investors who want to keep the list of mutual fund schemes they invest into short.”

Rajat Dhar, director, Indian Investors Federation, says, “Interest rates are about to peak. If they come down next year, mid- and small-cap stocks should do well and an investment in a multi-cap scheme can be a better way to benefit from that up-move, compared to investing in a mid-cap or a small-cap fund which can be very volatile.” An investment in a multi-cap fund can be considered if it suits the risk profile of the investor and who has a time frame of at least five years, he adds.

The scheme’s mandatory exposure to mid- and small-cap stocks can bring in unpredictability to the portfolio as these stocks are more volatile when stock markets correct. Further, the fund manager may choose to allocate more to mid- and small-cap stocks after allocating the minimum required allocation to large-cap stocks, which may add to expected volatility.

Moreover, shares of companies that have a scalable business or are market leaders in their respective sectors may command premium valuations. This may inflate portfolio valuations.

But Patil claims to have a solution to overcome these issues in the form of the ‘macro-based valuation check’, an internal framework the fund house uses. He claims that this ‘qualitative and quantitative framework’ for stock selection and market cap allocation will ensure that the allocation is aligned with market moves and avoids exposure to overvalued stocks without sacrificing the ability to participate in growth opportunities.

Multi-cap funds can work for those who want to invest across large, mid-sized and small companies.

However, the exposure offered by a multi-cap scheme may not be in the same proportion sought by an investor. After the SEBI dictate of investing minimum 25 percent each in large-, mid- and small-cap stocks kicked in, many fund houses realigned their portfolios of multi-cap schemes accordingly between November 2020 and February 2021. Prior to that, very few schemes were managed as true multi-cap funds. As multi-cap funds build their track record, they can be a strong contender for the core portfolios of investors.

Wait for LIC MF’s Multi-Cap till it builds a track record before you consider investing in it. Joshi says, “Stick to mutual fund schemes with proven track records, unless the new fund offer brings to the table something unique in terms of a new asset class, a new investment strategy which may not be available in existing schemes.”

The NFO will close for initial subscription on October 20.