SBI Mutual Fund, which is the country’s largest asset manager, is launching its own multi-cap scheme. The new fund offer (NFO) offer opens today (February 14).
What’s the scheme about?
SEBI rules state that a multi-cap fund needs to invest a minimum 25 percent each in small-cap, mid-cap and large-cap stocks. However, SBI Multi-cap Fund would be investing 27 percent each in each of these market caps. The remaining will be at fund manager’s discretion.
Ruchit Mehta, head of research at SBI MF, say that the additional two percent (instead of 25 percent) is to have a buffer against market volatility. While the fund will be managed by R Srinivasan, who is the head-equity at SBI MF, the fund will build the portfolio from the high-conviction ideas of its team of 15 sector analysts.
What works?
The fund will be benchmarked against Nifty 500 Multicap 50:25:25, but it will not try to align its sector weights just to be closer to the index weights.
As Mehta points out that any scheme out there today benchmarked against large-cap indices is forced to take heavy allocation to financial services sector, as the sector has as much as 33 percent weightage in large-cap indices. “So a benchmark-conscious fund manager will have to manage sector weights so as to reduce the risk of underperforming the index,” he says.
SBI Multicap Fund will not construct the portfolio based on index weights. The portfolio will capture stock investment ideas that will be captured through the analyst team’s rigorous research framework.
The stock research process that the analyst team will follow will filter high-conviction investment ideas from the SBI MF’s 750 stock coverage, which is split into passive and active universe.
The high-conviction ideas generated by analysts will be ranked in order of their preference. Against each stock idea, the analyst will put out a confidence score ranging from 1-5. This score reflects the analyst’s view on the company’s fundamentals, the growth potential, the management quality, valuations, etc.
Then there will be an overlay of sector outlook, with the preference given to stocks where the fund house has a positive sector view.
This list of high-conviction ideas will also include international stocks. The fund has built in a provision where it can invest up to ten percent of the scheme corpus in international stocks.
The fund manager will pick from these high-conviction ideas and account for factors such as liquidity of the stock, existing stock ownership and whether a meaningful allocation can be made to the stock.
What doesn’t work
The fund will aim to keep the number of stocks in its portfolio, in the range of 30-35 at any given point of time. So, the fund will be run like a focused fund.
“While taking high-conviction investment calls can give outsized returns, but it can also lead to concentration risks, if not managed carefully,” says Rupesh Nagda, founder and managing director of Family First Capital.
Srinivasan says, “There are several research papers out there that suggest that beyond 20 stocks, the benefits of diversification peters down significantly.”
A multi-cap fund may go through periods of higher volatility compared to flexi-cap schemes due to the former’s higher allocations to mid- and small-caps.
Also, multi-cap funds may do well when the broader markets rally, but could underperform if markets turn narrow and large-cap stocks lead the gains. During such periods, flexi-cap funds could outperform, as they can increase their large-cap exposure.
Vishal Dhawan, founder and chief financial planner of Plan Ahead Wealth Advisors, says that flexicap funds might be more suitable for investors right now, given lack of clarity on whether current market valuations are justified or excessive. “Getting into a flexicap fund with a track-record would be better as fund manager has flexibility to move allocations across market segments, with no minimum limits,” he says.
Moneycontrol’s take
R Srinivasan has considerable experience at managing funds with high-conviction investment calls. A multicap fund gives an investor exposure to all market segments within the same portfolio. But, the multicap category is still a newly-defined category by SEBI and one that needs to build a track-record. Once the fund and the category has built a track-record, investors can consider SBI Multicap Fund for their investment portfolio. The NFO closes on February 28.
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