On the watchlist . Should you invest in HSBC Multi Cap Fund NFO?

HSBC Mutual Fund, which acquired schemes of L&T MF, has launched a new equity offering ‘HSBC Multi Cap Fund’. The new fund offer period of the scheme ends on January 24. This is the first product launch after HSBC completed the acquisition of L&T MF in November 2022. The multi-cap product basket, driven by investing across large-cap, mid-cap, and small-cap stocks, is required to invest at least 25 per cent of their assets each in the aforementioned categories of stocks. The latest from the HSBC stable will compete with 15 others in this relatively newly-minted fund category. How different shall it be? Read on.

Wider net

Some consider multi-cap funds to be an all-weather investing solution. This is because the diversity of market cap allocations can help the fund throughout various market cap cycles. For instance, large caps outperformed/fallen less in 2006, 2008, 2010, 2011, 2013, 2018 and 2019. Midcaps outperformed in 2012, 2015 and 2016. Small caps outshone others in 2005, 2007, 2009, 2014, 2017, 2020 and 2021.

Also read: How the biggest large-, mid- and small-cap funds fared in 2022

The defined allocation to m-cap segments i.e. minimum 25 per cent allocation each to large cap (top 100 stocks), mid-cap (101st to 250th stock), and small-cap stocks (beyond 250 stocks) means a minimum of 75 per cent of assets are always invested in equities. Compared to this, flexi cap funds have a minimum of 65 per cent equity exposure, and so have higher asset allocation leeway.

The balance up to 25 per cent in multi-cap funds is to be invested dynamically in equity or debt/money market instruments, an area where a product can differentiate itself from peers. It appears HSBC Multi Cap wants the flexibility to go overweight through dynamic exposure within the market caps or invest in debt securities and money market instruments when the occasion calls for it.

Combining all three market cap segments in one fund makes multi-cap funds, at least on paper, less volatile compared to standalone mid cap or small cap funds.

All season play

While the long-term outlook for Indian equities may be strong, large, mid and small-cap stocks typically may not perform in the same market cycles. Choosing which one to bet on could be difficult.

This is where the need for all-season performance could be met with a combination of combined cap portfolio.

Well-run multi-cap equity funds will proactively adapt to changes in market cycles, though they will be disciplined in allocation.

Also read: Canara Robeco Equity Tax Saver Fund: Should you invest? 

From a risk standpoint, large caps offer a lower probability of negative returns or limit downside within equities over the long term. Mid-caps offer more potential of delivering high growth, while small caps offer more probability of delivering high alpha (excess return over benchmark). A multi cap portfolio approach could net the best of both worlds.

Multi cap funds offer better risk-adjusted performance

Why mid, small caps now

According to HSBC MF, this is a good time for investors to build their mid and small Cap portfolio considering the growth momentum in the Indian economy. New listings, market share shift from unorganised to the organised sector, a robust earning growth momentum cycle and relatively reasonable valuations are the reasons driving this thinking. This apart, historically, mid and small Caps have delivered reasonable performance over medium to long term, as they are often home to emerging business leaders.

If you take the NIFTY 500 Multicap 50:25:25 TRI as a multi-cap benchmark, you will see that it has delivered 21.8 per cent CAGR over the 3 years, 12.2 per cent CAGR over the 5 years, and generated 15.5 per cent CAGR over the last 10 years. Historically, multi cap Funds delivered above average returns while keeping volatility at relatively moderate levels.

In CY22, large caps outperformed mid caps and small Caps - unlike in the previous two years when declining interest rates and easy liquidity had fuelled a rally in mid and small caps. If financial market conditions remain relatively tight for most of CY23, large-cap bias will help. Increasing exposure to broader markets will bear fruit as and when the interest rate cycle begins to turn.

Our take

To be managed by Venugopal Manghat, HSBC Multi Cap aims to focus on bottom-up stock picking and strong franchises. As a proof of concept, in terms of dynamic management of portfolio, the HSBC Value (erstwhile L&T India Value) seems to have managed allocation across market caps well (the top in the category for a 10-year time frame). This fund too is managed by Manghat.

Some multi cap fund peers in the last few years have churned portfolios considerably in the quest for better returns, as they are more atuned to momentum and opportunistic style of investing. The HSBC Multi Cap doesn’t appear to be like that.

Also read: 10 years of mutual fund direct plans: Here’s how much more you earned

It is true that exposure towards small and mid-cap companies can increase portfolio volatility. So, in general, multi-cap funds aim to reduce volatility with exposure to large caps. According to ACEMF data, the average large-cap allocation in multi-cap funds stands at 41.15 per cent, with some like HDFC Multi Cap (45%), Invesco India Multi Cap (43%), ITI Multi Cap (49%), Nippon India Multi Cap and Quant Active (both 43%) and Union Multicap (~46%) having above average large cap slant. We would like to see on which side does HSBC Multi Cap finally settle.

Investors can consider keeping this new fund on their watchlist and track performance.

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