Multi-cap funds continue to attract mutual fund investors. According to the Association of Mutual Funds of India (Amfi), these funds recorded inflows of Rs 7,084 crore in July 2024, the highest among diversified equity schemes. Traditionally, the mutual fund industry has offered actively managed multi-cap schemes.
However, the past few days have seen a surge in passive fund offerings under this category, including Navi Nifty 500 Multicap 50:25:25 Index Fund, HDFC Nifty 500 Multicap 50:25:25 Index Fund and Mirae Asset Nifty 500 Multicap 50:25:25 Exchange-Traded Fund (ETF). “With markets touching new highs in July 2024, passive multi-cap funds can be a good option for investors as they offer well-distributed exposure to large, mid and small cap companies. They have a moderate risk-return profile and are less risky than pure mid and small cap funds,” said Siddharth Srivastava, Head – ETF Products & Fund Manager, Mirae Asset Investment Managers (India).
The multi-cap universe
Multi-cap plans allocate at least 25 per cent to large-, mid- and small-cap stocks, with the remaining 25 per cent invested at the discretion of the fund manager. “This diversification reduces risk as the fund is not overly exposed to any particular market segment,” says Ravi Kumar TV, Founder, Gaining Ground Investment.
As of July 31, 2024, 26 multi-cap schemes had assets worth Rs 1.68 trillion under management, according to Amfi data. The performance of these schemes is often compared with the Nifty Multicap 50:25:25 Total Return Index, which includes 503 stocks of large-, mid- and small-cap companies, weighted at 50%, 25% and 25%, respectively. The top three sectors in the index are financial services, capital goods and information technology, with weights of 25.1%, 8.8% and 8.3%, respectively.
Active funds vs passive funds
Passive funds take the risk away from the fund manager. “Over the last three years, active multi-cap funds have allocated 37-44 per cent to large-cap companies, 21-27 per cent to mid-caps and 25-30 per cent to small-caps. In contrast, the ETF-based Nifty 500 Multi-cap 50:25:25 index offers a fixed exposure of 50 per cent to large-cap companies and 25 per cent to mid-cap and small-cap segments. Being rule-based, there is no risk of over- or under-allocating to a market-cap segment, sector or stock as per the fund manager’s view,” says Srivastava.
However, passive funds have limited flexibility to adjust their positions based on market conditions. “If certain sectors underperform, passive funds cannot change course. Investors miss out on the alpha that active multi-cap funds generate. Exposure to mid- and small-cap stocks introduces volatility and risk compared to large-cap funds,” says Ravi Kumar.
The best for the undecided
Passive multi-cap funds are beneficial for investors who are unsure of their allocation within equities as they make rebalancing across market cap segments tax-efficient and easy. Individuals may find it difficult to rebalance their investments on their own. “Passive multi-cap funds are suitable for investors who prefer a long-term, hands-off approach and are content with returns that track the market. Those looking to benefit from broader market swings, such as those captured by active fund managers, should consider active multi-cap funds,” says Ravi Kumar. “Cost-conscious investors may prefer a passive multi-cap product like an ETF, which does not carry an exit load and can be traded on exchanges like stocks,” adds Srivastava.
First published: August 19, 2024 | 10:22 PM IS
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