In September 2020, the Securities and Exchange Board of India (SEBI) tweaked the asset allocation norm for Multi Cap Funds by mandating them to invest 25% each in large, mid and small cap stocks.
This was done to ensure that funds remain true to label. In their earlier avatar, Multi Cap Funds were skewed towards large cap stocks since there was no restriction on market cap allocation.
Many Multi Cap Funds converted their existing schemes into Flexi Cap Funds, a new category created by SEBI in November 2020. As the name suggests, Flexi Cap Funds have the leeway to move across market cap segments as the fund manager deems fit.
In the recent past, HDFC, Axis, Aditya Birla Sun Life, and Kotak have launched Multi Cap Funds.
In this calendar year so far, Flexi Cap Funds have received cumulative net inflows worth Rs 12,813 crore. During the same period, Multi Cap Funds have received almost similar inflows to the tune of Rs 12,800 crore.
As of October 2021, the industry has 28 Flexi Cap Funds and 12 Multi Cap Funds. Going ahead, more AMCs will try to fill this product gap by launching Multi Cap funds.
Risk
Multi Cap Funds will be relatively riskier as compared to Flexi Cap Funds as a minimum of 50% allocation is always in mid and small cap sectors.
On the contrary, Flexi Cap Funds can move a large portion of assets to large cap funds if the mid and small cap segment is getting hammered. This could protect the downside to some extent.
As of September 2021, Flexi Cap Funds category had maintained average exposure of 65% in Large Caps. On the other hand, Multi Cap Funds had an average exposure of 50% towards Large Caps.
The market has been correcting over the last few weeks. If we look at the 1-week return, the bottom performer in Flexi Cap category has delivered a negative 4.56% while the bottom performer in Multi Cap has delivered a negative 6.54%.
“If an investor isn’t exactly sure about giving their fund manager the flexibility to decide on segment allocation, then Multi Cap category is for them. But remember that rigidity to have 25% each in mid-small-cap segment does make the Multi-Cap funds riskier compared to those Flexi Caps that are predominantly large-cap oriented. So in my view, most people are better off with Flexi Cap funds instead of Multi Cap funds,” says Dev Ashish, Founder, StableInvestor.
Diversification
One area where Multi Cap Funds score over Flexi Cap Funds is that fund managers do not have to time the entry and exit in Mid and Small Cap segments.
If there is a sudden rally in Mid and Small cap stocks, Multi Cap Funds will benefit as they have to stick to mandate allocation. “Flexi Cap will have more flexibility to move between large, mid and small and they will try to generate alpha from stock as well as market cap selection. Multicap will be more tight mandate and will have more focus on stock selection with pre-defined cap. For stability of mandate, Multi Caps score over Flexi Caps. Sticking to mandate is more fruitful over the period,” observes Vinod Jain of Jain Privy Client.
“Out of the last 16 Financial years (FY06 to FY21), Large caps have been the top performing market cap segment in 6 years, Mid Caps in 3 years and Small Caps in 7 years. Consequently, this presents a strong case for diversification across market cap segments. However, deciding the allocation to Large, Mid and Small Caps is not easy for most investors. Multi Cap approach helps investors focus on diversification instead of predicting outperformance/underperformance of different market cap segments,” states a note released by HDFC Mutual Fund.
Prakash Praharaj, Founder & Chief Financial Planner, ·Max Secure Financial Planners, says that retail investors who desire to take a fixed allocation in a single fund can invest in Multi Cap Funds instead of separately investing in dedicated Small and Mid Cap Funds which can be relatively volatile.
So which one should you go for?
Ashish says that there is no thumb rule as to which category is right or wrong. “It depends on what the investor (and the adviser) decide is best for the overall MF portfolio of the investor.”
Track Record
Ashish says that Flexi Cap Funds (which were erstwhile Multi Cap) come with a proven track record which is missing the case of Multi Cap Funds under the new asset allocation rule. “Even though Flexi Cap is a newly defined category, it's simply Multi Cap Fund of yesteryears, with the same flexibility. So there is a lot of vintage and performance record for this category. Multicap funds of today on the other hand are just a few years old and yet to prove themselves.”
Over a one-year period as of November 22, 2021, Multi Cap Funds category has delivered 55.85% while the Flexi Cap category has delivered 44.63%.
It remains to be seen how Multi Cap Funds perform under different market cycles given that they have a fixed allocation of 50% to Mid and Small Caps.
Deciding which category to invest in would depend on your risk appetite and goal. Those who are looking at owning a single fund for Large, Mid and Small Cap exposure can opt for Multi Cap Funds.
