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Why multi-cap mutual funds are new retail investor favourites

Given the broad market rally, investors are looking for a blended exposure

January 12, 2022 / 09:43 AM IST

The collection counters of multi-cap funds have been overflowing in recent months. The latest data from industry body AMFI shows that the three new fund offers (NFOs) launched by Axis MF, HDFC MF and IDFC MF collected a combined sum of Rs 9,509 crore.

Axis MF’s Multi-cap fund collected Rs 4,779 crore, while HDFC MF’s scheme received Rs 4,000 crore. IDFC MF’s Multi-cap Fund got Rs 730 crore. These fund houses closed their NFOs in November and December 2021.

Investment across market caps   

“Multi-cap funds ensure that investors are exposed to all segments of the market at all points of time. Given the broad market rally, investors are looking for this kind of exposure,” says Amol Joshi, founder of Plan Rupee Investment Services.

The broad market rally has led to mid and small-cap stocks doing well. Investors do not want to miss out on a potential upswing.

The S&P BSE Midcap has given 33 percent in the last one year, while the S&P BSE Smallcap has delivered about 60 percent in the same period.

Data from Value Research shows that the multi-cap fund category has been among the best-performing equity categories in the one-year period. The category has given 40.86 percent returns on an average. Only small-cap, information technology and infrastructure sector funds have done better.

Multi-cap funds were re-defined by regulator SEBI in 2020 and are now required to hold 25 percent each in small, mid and large-cap stocks.

As these funds will maintain at least 50 percent allocation to mid and small-cap stocks, these schemes may suffer higher volatility during market corrections.

What should investors do?

SEBI changed the allocation rules for multi-cap funds, as they tended to be large-cap heavy, with insignificant exposures to other segments. Later, mutual funds re-positioned their erstwhile multi-cap funds as flexi-cap schemes that allow fund managers to invest across market caps without any restrictions.

Multi-cap funds may do well when the broader markets rally, but tend to 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. Investors who did not participate during the NFOs can wait for the multi-cap category to develop a track-record before considering them.

Jash Kriplani
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Jan 12, 2022 09:22 am