Adding to the list of new fund offers (NFOs) is the newly launched Canara Robeco Multi Cap Fund that aims to generate long-term capital appreciation through diversified investments in equity and equity-related instruments across large-cap, mid-cap, and small-cap stocks. This is not the first time that a multi-cap has been launched in the market. Before this, many asset management companies (AMCs) launched multi-cap funds that yielded decent returns in the past.
Assessing multi-cap funds’ asset allocation
As opposed to most other funds dedicated to a particular market capitalization or sector, multi-cap funds invest a minimum of 25 per cent of the assets under management (AUM) each in large-cap, mid-cap, and small-cap stocks. Investing in large-cap stocks offers stability, whereas investing in mid-cap and small-cap segments presents an opportunity to invest in potential multibagger stocks that can yield significant returns.
The remaining money is put in debt instruments or units issued by REITs and InvITs, thus, underlining how the risk is equally divided among all market caps while also including some debt components to induce more stability in returns, irrespective of sudden market downturns.
Take, for example, the proposed asset allocation in the newly introduced Canara Robeco Multi Cap Fund, which is given below.
| Instruments | Indicative allocations (% of total assets) | Risk Profile | |
Minimum | Maximum | ||
Equity and Equity-related Instruments of Large, Mid, and, Small cap companies of which | 75 | 100 | Very High |
Large Cap Companies Mid Cap Companies Small Cap Companies | 25 | 50 | |
25 | 50 | ||
25 | 50 | ||
Debt and Money Market Instruments | 0 | 25 | Low to Medium |
Units issued by REITs and InvITs | 0 | 10 | Very High |
While the idea of putting money in multi-cap funds seems enticing, this form of portfolio allocation is not too old, and hence, a matter of concern. Though some fund houses have managed to optimise asset allocation and manage good earnings for the investors, past returns do not guarantee future performance.
Don’t confuse multi-cap funds with flexicap funds
Apart, there is a catch that many investors tend to ignore. As opposed to flexicap funds where the asset allocation between large-cap, mid-cap, and small-cap stocks is not fixed and can be shifted depending on stock and sector performance apart from market opportunity, the allocation of the fund money between the large-cap, mid-cap, and small-cap stocks remains relatively fixed. This disallows the fund manager to participate in sudden investment opportunities that the market throws to its investors from time to time.
Hiren Thakkar, Chartered Accountant Proprietor, Hiren S Thakkar & Associates added, “In a multi-cap fund, there is a mandate to invest 25 per cent of the AUM to each small-cap, midcap, and large-cap sector. In flexi-cap funds, liberty is given to the fund manager to decide which helps the fund manager to either increase or decrease the allocation to mid/small and large-cap stocks. In cases of euphoria, the fund manager can switch from the small-cap sector to any other cap sector and vice versa, which will help him to take tactical calls.”
The fixed 50 per cent allocation to mid-cap and small-cap stocks is indeed a cause of concern, especially for investors not willing to take unwanted risks. Though due to their high-risk nature, investing in such stocks can potentially yield significant returns in the long term, the effect of sudden market crashes due to unforeseen geopolitical tensions, natural calamities, and huge market scams can be tremendous.
Debt investments may help ring in stability but are they completely devoid of risk? The answer is “No” if you look at certain essential factors involved. It is essential to consider the inherent components of interest rate risk, reinvestment risk, credit risk, and liquidity risk in debt investments, as they cannot be disregarded.
This fund also allocates a maximum of 10 per cent of its investments in REITs and InvITs, which entails a higher level of risk. Viral Bhatt, Founder, Money Mantra said, “Multi-cap funds that invest in REITs and InvITs face the following risks:
Market risk: The value of REITs and InvITs can go up and down with the stock market, so multi-cap funds that invest in these securities can be exposed to market risk.
Interest rate risk: REITs and InvITs are sensitive to changes in interest rates. When interest rates rise, the value of REITs and InvITs can fall.
Liquidity risk: REITs and InvITs can be less liquid than stocks, which means that it may be difficult to sell them quickly if you need to.
Management risk: The performance of a multi-cap fund that invests in REITs and InvITs will depend on the skill of the fund manager. If the fund manager makes poor investment decisions, the fund could underperform the market.”
“In addition to these risks, multi-cap funds that invest in REITs and InvITs may also face risks specific to these types of securities. For example, REITs are required to pay out at least 90 per cent of their taxable income to shareholders in the form of dividends, which means that they may not have as much money available to reinvest in their businesses. InvITs, on the other hand, are not required to pay out dividends, but they may be more volatile than REITs.
Overall, multi-cap funds that invest in REITs and InvITs can be a good way to diversify your portfolio and get exposure to these asset classes. However, it is important to understand the risks involved before investing,” added Bhatt.
Focus on quality than price
Most investors make the mistake of jumping into NFOs thinking that they would be able to garner more units at lower costs. This has caused many to suffer unwarranted losses in the long run. Before investing in such schemes, investors should carefully review all the risk factors outlined in the scheme information document (SID), which is largely ignored in favour of low net asset value (NAV) in most cases.
Apart, investors would be in a quandary about whether to invest in this fund considering how this is comparatively new. There is no way to know how this fund would perform in the future. Investors with a high-risk tolerance can consider investing in this scheme for a medium to long-term investment horizon. Individuals interested in allocating their funds to this type of investment may choose from the available funds within this category.
