How would you choose a multi-cap scheme? This is a key question on investorsâ minds after the Securities and Exchange Board of India (Sebi) issued a new directive for multi-cap schemes to allocate a minimum 25% of their portfolio to each of the three categories: large-cap, midcap and small-cap companies.
Distributors and mutual fund research analysts recommend investors to increase allocation to multi-cap schemes where exposure to mid-cap companies is either relatively lower or slightly higher than small-cap.
Why so? One, the investable universe of mid-sized companies offers more interesting ideas to boost returns. Second, liquidity in mid-cap counters is better than small-caps. Third, balance sheet strength, corporate governance, brand power and the ability to withstand fluctuations in demand for goods at mid-caps are greater than that in small-caps.
But investors must wait for fund houses themselves to take action, as the extent of changes may not be as drastic as is being considered.
âWe will look at investor interest first. If nothing changes, we believe there are options available to run the same strategy,â said Neil Parikh, CEO, PPFAS Mutual Fund.
âOver the weekend some fund houses have had conference calls and assured they will protect investor interest. Larger fund houses could recategorise their funds, in which case investors donât have to act,â said S Shankar, CFP, Credo Capital.
Fund houses are also in talks with the regulator to create a new flexicap category.
âMulti-cap funds will not have significantly different performance as compared with broad markets, so there will be no sudden drop in NAVs,â said Vijay Mantri, co-founder, JRL Money.
According to the data available on Value Research, mid-cap schemes have outperformed small-cap ones in the past five-year and 10-year periods, giving average returns of 7.34% and 11.1%, respectively. In the same time-frames, the small-cap category has given average returns of 7.2% and 9.1%, respectively.
So, a multi-cap scheme where exposure to mid-cap companies is slightly higher than small-cap companies could fetch better long-term returns. This can be illustrated with examples. As of August, according to GEPL Capital data, BNP Paribas Multi Cap schemeâs exposure in mid-caps was 8.7% in comparison with 11.3% in small-caps. Also, in August, GEPL Capital data points out that HDFC Equity had mid-cap exposure of 5.38% in comparison with 3.93% small-cap.
According to an analysis of Edelweiss Professional Investor Research, adjusting for cash holdings, large-cap stocks are expected to see an outflow of close to Rs 35,998 crore while mid-cap and small-cap stocks are expected to see an inflow of close to Rs 13,145 crore and Rs 27,933 crore, respectively.
In the light of these facts, distributors and analysts also point out there is a high likelihood that in the coming months multi-cap schemes may have concentrated exposure to mid-cap companies to boost returns. Besides this, they foresee a possibility of fund houses merging their multi-cap schemes with their existing large-cap or large-and mid-cap schemes.