A sharp rally in small- and mid-cap stocks has put multi-cap funds on the spotlight once again, for the right reasons this time around.

Though most of the multi-cap funds have underperformed the benchmark, they have delivered returns of 65-80 per cent in the last one year, led by Mahindra Manulife Multi Cap Badhat Yojana and ICICI Prudential Multicap, with respective annual return of 80 per cent and 78 per cent as on March 26. The benchmark Nifty 500 Multi Cap Index has delivered return of 92 per cent in the last one year.

Rajat Chandak, Fund Manager, ICICI Prudential Multicap, said higher exposure to auto ancillaries, financials, consumer durables and retail boosted ICICI Multicap’s performance. Going forward, he said, the banking sector is well-poised for robust performance as credit costs are likely to be lower while higher allocation to mid- and small-cap will aid to make the most of expected cyclical economic recovery.

Pranav Gokhale, Fund Manager, Invesco Mutual Fund, said while the fund had to take the distress call when mid-, small-caps corrected in 2018-19, the conviction backed by bottom-up stock picking worked in favour over the last one year. “Our philosophy is identifying scalable businesses which generate industry-leading cash flows. It should work well in the current environment and investors with a longer-term outlook should consider investing in this fund,” he said.

Regaining lost ground

The multi-cap funds have seen huge outflows ever since market regulator SEBI last September issued a circular mandating multi-cap funds to allocate at least 25 per cent of their portfolio in large-, mid- and small-caps each to ensure that they are true to label by February. Till then, most of the multi-cap funds were heavy on large-cap stocks and low on mid- and small-cap stocks. Between last September and December, multi-cap funds has seen a net outflow of ₹9,430 crore.

In November, SEBI approved a new category of flexi-cap funds with the freedom to invest across market caps. Of the 35 multi-cap funds with AUM of ₹1.68 lakh crore as of December-end, 25 have reclassified as flexi-cap fund in the last two months. However, multi-caps have regained most of its lost ground by recording an inflow of ₹6,936 crore in last two months.

Pankaj Jain, Partner, Money's Worth Finserv, said the multi-cap funds in last one year have been able to reallocate some of the sectorial positions in line with the evolving macro-economic scenario, both in India and globally.