The country’s largest mutual fund house, SBI MF, has thrown its hat into the multi-cap fund space that currently has 14 schemes. Multi-cap funds are positioned as an all-weather vehicle, given that their investment in large-caps aims to steady the ship during volatile times such as the current one, while measured exposure to mid- and small-cap companies aims to drive returns. Overall, finding the right balance during different market phases is the hallmark of well-run multi-cap funds.

Strategy

In September 2020, the playing rules in multi-cap segment were tweaked, with each fund mandated to invest a minimum 25 per cent in large-, mid- and small-cap stocks. The allocation of the balance portion is strategic in nature. At present, funds in this category have allocated 34-47 per cent to large-caps, 25-27 per cent to mid-caps, and 25-32 per cent in small-caps.

SBI Multicap Fund aims to have diversified allocations across market capitalisations (market caps). The flexible portion will be used to invest in a market cap agnostic manner, which would be different from most peer funds who tend to rely on large-caps. Do note that the tactical use of this flexible portion in mid- and small-caps could boost returns but that could also expose the funds to greater market risk.

The NFO aims to have no sector bias. Bottom-up approach to stock picking will take priority over allocation based on sector preference. The fund will carry a portfolio that combines the strength of high-conviction stock ideas of the 15 sector analysts who actively cover 350 stocks. The aim is to invest in the 30-35 best ideas across sectors as against the usual approach deployed by multi-cap fund peers who invest in 45 to 90 stocks. The new fund is aimed at being style agnostic, instead of focussing on value, growth or blended tilt.

While the new fund will be benchmarked to Nifty 500 Multi-cap 50:25:25 TRI (total return index), it seeks to pursue active fund management seriously, given that representation of sectors based on market cap rank may not be conclusive of good businesses. Index hugging also exposes a fund to the risk of being over-exposed to expensive stocks and underweight on ones more attractively valued.

Once the fund builds its portfolio post NFO, it will be clear what kind of overweight/underweight positions it has taken vis-a-vis its benchmark where top sector choices are Financial Services (25.7 per cent), IT (12.2 per cent), Consumer Goods (11.1 per cent), Oil & Gas (7.2 per cent) and Industrial Manufacturing (6.1 per cent). This is important because the fund has an absolute return orientation towards investing, with focus on investing in quality businesses with superior economics.

Our take

Multi-cap funds, with their blended portfolio approach, are expected to enhance the opportunity for higher alpha. But things don’t always work out as envisioned. For instance, only 38 per cent and 15 per cent actively managed multi-cap funds have beaten Nifty 500 Multi-cap 50:25:25 TRI in 3-year and 5-year periods (ended January 22) respectively. The number improves to 57 per cent in the 10-year period. It must be seen how the numbers hold up, going forward. With higher allocation to mid and small-cap stocks, the fund’s volatility can be far higher as can its returns.

Multi-cap funds are often held as better downside protectors compared to mid- and small-cap funds. But do note, the maximum drawdown in multi-cap portfolios was higher than standalone mid-caps in 2012, 2015 and 2020, though on the whole multi-cap portfolios managed bad times better than their standalone small-cap peers.

That said, the big question is whether you need a multi-cap fund in your portfolio. Note: multi-cap funds in their current avatar with a minimum 50 per cent invested in mid and small-caps are more aggressive than large- and mid-cap funds. Flexi-cap funds, with proper track record, stand a better chance at mitigating the risk, compared to multi-cap funds that are forced into buying mid- and small-cap stocks given the fund’s mandate.

The new fund offer period of SBI Multicap Fund closes February 28.

Fundas
Invests across market cap spectrum
No sector bias or style bias
High-conviction ideas, bottom-up stock picks
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