The multi-cap schemes of mutual funds have managed to beat the market volatility and deliver better returns than their benchmark despite investing 25 per cent of the corpus in small-cap funds.

The overall assets under management of multi-cap funds increased 23 per cent in May to ₹54,714 crore against ₹44,516 crore logged in January. The investors’ folio in 14 multi-cap funds increased to 33.08 lakh from 25.67 lakh.

Sailesh Raj Bhan, Deputy CIO (Equity Investments), Nippon India MF, said multi-cap funds participate in broader markets across market caps which widens the range of stocks for alpha generation.

Additionally, it removes the need for excessive timing of market-cap allocations and reduces the allocation risk that other categories of funds might be subject to. While all three categories allow for alpha creation, large caps provide the portfolio with a high level of stability.

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Quant Active Fund and Mahindra Manulife Multi-cap Badhat Yojana had delivered a return of 28 per cent and 20 per cent in three years and 21 per cent and 15 per cent in five years, respectively.

Nippon India Multi-cap Fund, which has an asset of ₹11,639 crore, delivered 12 per cent each in the same period. The benchmark Nifty 500 multi-cap return of 15 per cent and 11 per cent.

Portfolio mix

Manish Lodha, Fund Manager (Equity), Mahindra Manulife Mutual Fund, said post-Covid, economic recovery chartered a varied growth path across sectors and companies. Agility in identifying specific areas of recovery and growth, within the macro trend of formalisation and digitisation of the Indian economy, reflects in portfolio mix.

As per SEBI norms, multi-cap funds have to invest 25 per cent each across large-, mid- and small-cap stocks while the fund managers have the discretion to invest the remaining to generate the alpha.

This was done two years back to avoid these funds investing only in large- and mid-cap stocks and ignoring small-cap stocks. The regulator ensured that these funds remain true to their label.

Further, Sebi segregated top 100 companies in terms of market cap as large-cap and companies from 101 to 250 were ranked as mid-cap while the remaining stocks were grouped as small-cap companies.

However, many fund houses and investors then claimed that they’re being forced to have exposure in illiquid small-cap stocks. Following this, SEBI introduced a new category of fund Flexi-cap that invested across market-cap without any restrictions. Most of the fund houses renamed their multi-cap funds into flexi-cap to avoid re-jigging their portfolio.

“Multi cap is among the best categories to do long-term investing as it takes away investor allocation bias and frequent portfolio churning which reduce returns due to high cost and timing mistakes. It remains a core and standard strategy to participate for investors in equity markets across cycles,” said Bhan.

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