As per norms, largecap funds must have at least 80% money in largecap stocks but to be a multicap fund one needs to merely have 65% of money in equity (irrespective of market cap)
When market regulator SEBI recategorised MF schemes sometime ago, the exercise was supposed to bring uniformity in how funds invest. Certain categories like multicap funds, however, can be argued to have got more freedom than others. As per regulatory norms, largecap funds must have at least 80% money in largecap stocks but to be a multicap fund one needs to merely have 65% of money in stocks (there is no market cap wise norm). As a result of this, investors choosing funds based on largecap stocks exposure today they may get confused about what exactly some multicap funds truly are. RupeeIQ found there are at least five multicap funds which have 80% or more money invested in largecap stocks, virtually making them largecap funds too. Read on.
As per regulatory mandate, multicap funds need to have a minimum investment in equity and equity related instruments of 65%. Their portfolio ideally should comprise largecap, midcap and smallcap stocks, but there is no regulatory instruction on how much largecap, midcap or smallcap should be represented. This technicality gives a multicap fund the freedom to be any equity fund they want to be! If a multicap fund has a lot of exposure to largecaps, it shows that the fund prefers largecaps. They may argue that largecaps have more potential compared to midcaps and smallcaps.
On the other hand, a plain-vanilla category like largecap funds has a much more strict operating mandate. According to SEBI’s norms, largecap mutual fund schemes have the mandate to invest at least 80% of the corpus in largecap stocks i.e. top 100 companies by market capitalisation. As you can see, largecap funds cannot really tilt their portfolio much towards non-largecap stocks. They can at the most invest 20% in midcaps amd smallcaps.
RupeeIQ came across five multicap funds that are using the freedom, including making their portfolio largecap biased, to the hilt. Let us take a look.
HDFC Equity Fund – One of the largest multicap funds in the country, HDFC Equity Fund has over 80% assets in largecap stocks. That is quite higher than the average 70% multicap fund category average for largecap exposure. For instance, the largest multicap fund Kotak Standard Multicap has largecap exposure of around 70%, which indicates that the size of a fund has no bearing on its higher largecap. Remember that HDFC Equity Fund fund takes controlled exposure to midcaps / smallcaps both at stock and aggregate level. Asset allocation to midcaps / small caps is a function of outlook and valuations.
Motilal Oswal Multicap 35 Fund – Almost 90% of this multicap fund’s exposure is in largecaps. Strangely, Motilal Oswal Multicap 35 Fund has more largecap allocation than even the fund-house’s largecap scheme – Motilal Oswal Focused 25 Fund, which has about 75% largecaps. The Motilal Oswal Multicap 35 Fund, it appears, is sticking to more largecaps today, compared to peer average. Since the performance of midcaps can diverge significantly over time depending on the phase of the cycle, the fund seems to be playing it safe in favour of largecaps at present.
Axis Multicap Fund – The fund has over 90% of its allocation towards largecaps, a reason why it may have outperformed many of its peers. The massive overweight stance on largecaps appears to be influenced by its big bet on financials (HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Bajaj Finance etc.)
Essel Multi Cap Fund – This fund has about 80% allocation to largecaps. The rest is in midcaps and smallcaps.
JM Multicap Fund – This multicap fund, which is among the best-performers in last one year period, has about 95% allocations to largecap stocks. There appears to be no smallcap allocation at present.
Take a look below at the returns of the aforementioned five multicap funds.
|1-yr %||3-yr %||5-yr %|
|HDFC Equity Fund||9.23||12.28||7.4|
|Motilal Oswal Multicap 35 Fund||9.47||12.1||11.71|
|Axis Multicap Fund||18.09||–||–|
|Essel Multi Cap Fund||14.61||–||–|
|JM Multicap Fund||18.67||14.75||10.29|
|All regular schemes Returns of more than 1 year are in CAGR format|
Many reason that largecap earnings as reflected by NIFTY50 EPS growth is estimated at 17.5% CAGR over FY18-21 compared to 3.5% between FY13 -18. Positioning a multicap fund portfolio towards high largecap exposure can come in very handy if these earnings estimates prove to be right. For now, corporate earnings growth remains lacklustre despite market participants giving rosy projections since 2014 for strong recovery. In FY20 so far, revenue growth of Indian companies is adversely affected by demand slowdown. Their profitability, however, benefits from cut in tax rates.
One of the bigger questions is whether multicap funds should become such pronounced largecap funds. Yes, multicap funds have the mandate to do active allocation between market cap segments. We dont disagree with that. But if a multicap fund is 80-90% into largecaps today, one wonders why the same fund-houses are talking about midcaps and smallcaps being ‘very attractive’ for investment.
Everybody in the MF industry is supposedly ‘long-term’. Then, why are some of the multicap funds not long-term about midcap and smallcap stocks today? Do valuations and outlook of midcaps and smallcaps currently make them largely unsuitable for a long-term multicap fund portfolio? Fund-houses can do well to answer these questions.
Investors interested in multicap funds must bear in mind that multicap funds are differently positioned. So, understand the fund’s philosophy and style before jumping into a fund. The category name may be multicap, but you will find multicap funds with largecap focus, with mid and smallcap focus etc.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial instrument like multicap mutual funds mentioned in this article.
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