scorecardresearchAre multi cap funds the right investment when flexi caps are seen as a better alternative?

Are multi cap funds the right investment when flexi caps are seen as a better alternative?

Updated: 05 May 2022, 03:35 PM IST
TL;DR.

How do multi cap funds tick the right box as investors have another option in flexi cap funds. We explore

Flexi mutual funds are allowed to choose the ratio between large, mid and small caps as it deems them fit

Flexi mutual funds are allowed to choose the ratio between large, mid and small caps as it deems them fit

Whether it is about choosing the right kind of clothing at a multi brand outlet, or eating at a multi-cuisine restaurant or making the right kind of investment – flexibility is seen as a virtue. In the light of this, flexi cap funds which are free to invest across the market capitalisation spectrum are believed to be a better alternative for investors who look for diversified fund as a sound investment bet.

For the uninitiated, flexi mutual funds are allowed to choose the ratio between large, mid and small caps as it deems them fit. On the other hand, multi cap funds are mandated to keep a minimum threshold of 25 percent in each of the three fund categories.

When this distinction was introduced after SEBI guidelines came into force, several mutual funds in the multi cap category moved to flexi cap.

Consequently, the multi cap space remains wide open with a number of AMCs yet to launch fund schemes in this space.

In the March quarter, net inflow of multi cap funds was 11,171.26 crore and the assets under management (AUM) for a total of 14 schemes under this category is 54,932 crore, as per AMFI data for Q4 of fiscal 2022.

Category                            SchemesInflow ( crore) AUM ( crore)
Multi Cap                                      1411,171.2654,932
Flexi cap                                        318,9502,25,430

(Source: AMFI. Data relates to March quarter, 2022)

In the month of March, the largest inflow in multi cap funds happened because of 8,000 crore NFO of SBI multi cap. Prior to this, Axis and HDFC mutual fund's multi cap NFOs garnered huge money in the month of December.

At the same time, net inflow for flexi cap funds is 8,950 crore and net AUM for a total of 31 schemes is 2,25,430, which is more than four times of multi cap funds' AUM.

As RBI raised its repo rate by 40 basis points on Wednesday, the banks are likely to follow suit, thus impacting the rate-sensitive stocks as well as funds.  

About the impact of repo rate hikes on mutual funds, S Sridharan, founder and principal officer of Wealth Ladder Direct says, there won’t be any direct impact on any category of mutual funds but cost of lending will rise in the aftermath of repo rate hike. “Lending rates of banks will increase, which may hinder companies’ ability to raise money and invest. This will impact the profit margin of companies and in turn, the mutual fund returns,” he says.

Multi cap

The maximum return in this category was posted by Baroda BNP Paribas Multi Cap Fund that gave a return of 35.19 percent:

Scheme                                                         1-year-return (%)
Baroda BNP Paribas Multi Cap Fund                      35.19
Mahindra Manulife Multi Cap Badhat Yojana       36.06
Invesco India Multicap Fund                          24.32
Nippon India Multi Cap Fund                                   35.27

(Source: AMFI as on March 31, 2022)

Flexi cap

There are 31 mutual fund schemes under flexi cap category. We show their returns here:

Scheme                                                 1-yr-returns (%)
Aditya Birla Sun Life Flexi Cap Fund        22.33
DSP Flexi Cap Fund                                      16.29
Franklin India Flexi Cap Fund                     24.45
IDBI Flexi Cap Fund                          29.75
Parag Parikh Flexi Cap Fund                      31.52
SBI Flexicap Fund                                       22.51
Tata Flexi Cap Fund                                      17.14
UTI Flexi Cap Fund                               16.25

(Source: AMFI data as on Mar 31, 2022)

“Whether an investor chooses flexi cap or multi cap depends on their risk appetite. In multi cap, investors are aware of the amount of risk they are undertaking whereas in flexi cap funds, they are not aware of the level of risk,” adds Mr Sridharan.

He explains this with an example. “Let us suppose a flexi cap scheme has 40 percent allocation to mid-cap and 30 percent each to large cap and small cap. When large cap stocks are expected to rise, the fund manager might allocate most of the portfolio to the large cap stocks. This way, investors’ wealth become more vulnerable to one category of funds. So, investors are unaware of the risk they take in flexi cap funds,” he adds.

On the other hand, in multi cap funds, investors are aware of the asset allocation i.e., 25 percent each in large cap, mid cap and small cap funds.

 

First Published: 05 May 2022, 03:18 PM IST