Are multi-cap funds a good option with expensive valuations?

HDFC Mutual Fund and Axis Mutual Fund will launch multi-cap schemes later in the month, while a new fund offer (NFO) by IDFC MF is open for subscription. Moreover, Aditya Birla Sun Life Multi-Cap Fund and Kotak Multi-Cap Fund were launched in May and September respectively.

To be sure, multi-cap is not a new category and it has been for years. However, in September, the Securities and Exchange Board of India (SEBI) had introduced new asset allocation rules for multi-caps, mandating a minimum of 25% allocation each in large-, mid- and small-cap stocks.

In November 2020, the regulator introduced a flexi-cap category for mutual funds, requiring them to invest at least 65% of the corpus in equities, but with no restrictions on investments in large-, mid- or small-cap stocks. was not.

As a result, there was a readjustment of the fund between the two categories, with some in the multi-cap category, while the majority moved to the flexi-cap.

“Since the funds could not meet the criteria in their multi-cap funds, a lot of them moved to the flexi-cap category. Fund houses are now launching multi-cap funds, as this category was vacant without any schemes. Instead of shifting the existing portfolio, it is easier to meet the regulations in a new fund,” said Bhavna Acharya, co-founder, PrimeInvestor.in, a mutual fund research portal.

As per the latest report by Morningstar India, Flexi-cap is the second largest category in the open-ended equity segment. Asset Under Management (AUM) in flexi-cap schemes was 2.15 trillion after large-cap funds ( 2.18 trillion), by the end of September. The AUM of multi-cap funds was 31,442 crore.

So, does it make sense to invest in multi-cap funds given the high market valuation and economic outlook?

“Under any circumstances, 50% combined allocation to mid- and small-caps would be riskier as compared to a flexi-cap fund and even a large and mid-cap fund. However, with higher risk comes increased returns. But how the higher allocation to riskier categories in multi-cap funds will affect returns when the market turns right, is difficult to predict as this category has yet to see some market cycles.”

According to experts, while building a portfolio, investors with small exposures should have a small allocation in equities, while a medium-risk or slightly moderately aggressive investor can have a mid- and small-cap component in the portfolio.

Tarun Birani, Founder, TBNG Capital said, “From the tolerance and suitability point of view, for the low-risk investor, one does not like to go straight to mid- and small-cap funds, hence schemes like multi-cap and flexi-cap work well. Huh.” , a SEBI-registered investment advisor.

However, Birani gives more priority to flexibility depending on the market conditions and suggests pure large-, mid- or small-cap funds rather than multi-cap or small-cap funds, as there are small-cap and mid-cap funds. look rich. valuable.

“Now the economies are starting to recover, showing good GDP growth and inflation is back in most of the economies. It looks like the market rally is now a mid to late cycle. This is the time to be more alert. Hence, one needs to know more about the large-cap or blue-chip category as well as the global diversification. Also, one can book profits in their pure small-cap strategy, if they have already made money.”