Investing across market capitalisations could be a reasonable diversification strategy for better risk-adjusted returns over the long term. And multi-cap funds allow you to do just that with the market regulator SEBI mandating a minimum 25 per cent allocation to each of large, mid, and small-cap stocks for schemes in the category.
Many investors who don’t wish to go all-out with small and mid-cap funds may find the multi-cap cap category to be a relatively less-risky way to participate in the broader market rallies.
Although a relatively recent category, a few funds that have been around for a long time with a multi-cap flavour moved to the category, while most fund houses decided to start afresh with NFOs.
Also read: UTI Balanced Advantage NFO: Should you invest?
Mirae Asset Multicap fund is the latest to join the list of NFOs and the offer is open from July 28 to August 11.
As a fund house, Mirae Asset has had a healthy track record with most of its equity schemes across categories.
Here’s more on whether investors should consider ploughing their money into the multi-cap NFO.
What’s the NFO about?
Mirae Asset Multicap fund will have a distinct growth tilt in its stock selection process. Around 75 per cent of the portfolio will be focused on high-growth companies and the target is to have firms that had greater than 12-15 per cent return on investment over the past 5-10 years. It hopes to have 40-45 per cent in large caps, and 35-30 per cent each in mid and small-cap stocks.
A quarter of the portfolio will have deep value stocks – trading at less than price to book.
Therefore, there is a blend of growth and value in the portfolio, though the growth bias is higher.
The earnings growth and valuation (PE multiples) over the past five years (FY18 to FY23) of large, mid and small caps makes for interesting observation.
The Nifty 100 TRI’s earnings per share (EPS) has grown at a compounded annual rate of 13.2 per cent over the past five fiscals. The EPS growth over this period was 13.2 per cent for the Nifty Midcap 150 TRI and 14.1 per cent for the Nifty Small Cap 250 TRI.
Also read: Bajaj Finserv Money Market Fund NFO: Should you invest?
The one-year forward PE multiple for FY23 in the case of Nifty 100 TRI is 19.1 times (22.3 times in FY18) according to data from Bloomberg. For the Nifty Midcap 150 TRI, the forward PE multiple is 23.3 times (33.3 times in FY18), and in the case of the Nifty Small Cap 250 TRI it is 16.6 times (25.5 times in FY18).
Valuations, though not cheap, do seem to be in the reasonable zone across market caps.
The fund will be benchmarked to the Nifty 500 Multicap 50:25:25 TRI. Now, when the 3-year rolling returns over April 2008 to June 2023 are taken, the Nifty 500 Multicap 50:25:25 TRI has delivered an average of 13 per cent return, while the Nifty 500 TRI has managed 12 per cent. Therefore, the multi-cap index is a marginal outperformer.
Of course, the Mirae Asset Multicap fund will be actively managed, but the above comparison gives a perspective on difference in returns.
What should investors do?
Many companies in sectors such as industrial products, agriculture-related segments, minerals, telecom equipment and accessories, household products, auto components, logistics, and the like would mostly fall in the mid and small-cap spaces.
Also read: Kotak Quant Fund NFO: Quantum leap or quagmire for investors?
Therefore, there is a substantial opportunity for returns in those segments. For investors not wanting to dabble in the lower market cap segments directly or via small-cap funds due to the high risk involved, the multi-cap category offers a good opportunity.
As mentioned earlier, as a category, multi-cap funds have been around only a little over two years. But many funds that had a multi-cap flavour much before SEBI’s categorization norms came about have a reasonably sound track record. In particular, Nippon India Multicap, Mahindra Manulife Multicap and Quant Active are funds that have a robust long term track record and can be good choices for investors.
If the India growth story indeed plays out as expected over the next several years, a broad section of the economy and many segments will have to participate.
Given Mirae Asset’s performance record in all equity categories, and as the category itself is of recent history, investors can consider small sums as SIPs in the fund with a long-term perspective of at least five years.