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The Mutual Fund Show: How To Approach Multi-Cap Funds

Multi-cap schemes, or diversified equity funds, have the flexibility to invest in stocks across market capitalisation. This lowers the amount of risk in the fund and helps to outperform the market in terms of returns.

But are multi-cap funds better investment instruments? Given that large caps outperformed multi-cap peers in the last 12 months, how are multi-cap funds positioned in the long term?

“Theoretically, it’s correct that multi caps should outperform large caps. But even within the large- and multi-cap categories, there is a divergence,” said Swarup Mohanty, chief executive officer at Mirae Asset Global Investments Pvt. Ltd. The flexibility to invest across market cap doesn’t mean that all multi-cap funds are same, he said during BloombergQuint’s weekly series The Mutual Fund Show. “It’s about specific funds and at the end of the day about the portfolio and not the category in general.”

Watch the full episode here:

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Here are the edited excerpts from the inteview:

One would have thought that multi-cap funds are better investment instruments to invest in considering that the fund manager has the flexibility to invest across market caps. Is that an advantage or disadvantage given how the large caps have outperformed in the last 12 months? And what does long-term look like?

Swarup Mohanty: Theoretically it is correct that multi-caps should outperform large caps. But if you scrape the top and dig a little deeper, if you look at the multi-cap segment of mutual funds, 70-72 percent is the average large-cap holding of multi-cap stocks across the segment. The difference between that and large-cap portfolio is 80 percent in large cap. So, the delta is around 8-10 percent. Is that good to outperform? That is something which I leave to investors to judge. Within the large-cap funds and multi-cap funds, there is divergence. It is about specific funds and not a broad category in general. You will have enough large-cap funds outperforming multi-cap funds and vice-a-versa. It is all about the portfolio at the end of day.

Portfolio is about bottom-up stock picking and that is what differentiates. You can’t broadly say that multi cap or large cap will outperform; a scheme will outperform.

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Several people say that in the last 12 months, the funds-concentrated rally and large caps have outperformed mid-caps and small caps by a wide margin. Maybe in 24-36 months, we will see some bit of recouping of this outperformance. Smartly picked mid and small caps will tend to give a higher return compared to large caps. Will that be a correct assessment? And therefore, would multi-cap funds be very well positioned to take advantage of it, if it does happen?

Gaurav Mishra, Senior Fund Manager, Mirae Asset India Equity Fund: Satisfactory performance in the times ahead and in the past is driven by picking up good businesses at the best possible valuations. It doesn’t matter whether they fall in the large-cap or small-cap category. It is true that mid and small cap as a category would have gotten very expensive related to the historic mean, but we have seen that correct. It has come down to mean levels. That is already the case with large-cap funds. If everybody is on an even starting wicket, it has got to be the stock selection from here on.

It is not that the opportunities facing a mid-cap fund or firm, which is falling under that bucket, is larger than the opportunity facing a large company. It could be the other way. The larger companies might be facing a much larger opportunity simply because they are already big, but they are addressing markets which only they can grow in. Therefore, they cannot outperform a firm which is relatively smaller in size addressing a much smaller market. So, there is no one answer to this. The valuations at an aggregate across these caps are currently at even-steven and it could be a collection of the best names which will help get that satisfactory performance for investors.

For investors, one has to have the faith in the Indian economy and the fact that we will see multi-years of robust growth. There will be opportunities for a lot of firms to continue to do well and create wealth. It could be across any market cap notwithstanding.

Your peers believe that in their multi-cap schemes, they now want to increase the allocation to the non-100 names a lot more compared to what they were doing over the past 12 months. What are you doing in your portfolio and what are the options available in your portfolio for investors who don’t want to invest in large-cap funds but want to invest in multi, mid and small-cap funds?

Mohanty: We have been contrary to that in the market. We just re-positioned our multi-cap fund—the Mirae Asset India Equity Fund—to a large-cap fund and it has been creating a fair amount of discussion around us. We are open to that discussion. It is now even-stevens for everybody. There is growth potential across. When you look at new investors coming in, we feel the first stop for a new investor is large caps. That, technically, does not happen in a market. Flows have suggested that at times it has gone through the mid-cap segment as a first investor. We don’t believe in it. There is a segment for every type of investor, whether he/she is an equity or debt investor.

We have seen over a period of time that safety of capital plays on everybody’s mind.

From a long-term perspective of the fund, we reclassified it as a large-cap fund since it has always been managed at a 75 percent minimum large cap.

Your stock picking has to be absolutely immaculate for the returns to come out. But you can deliver superior returns by not doing it, but by better stock picking. Both sides of the story have played out and we have demonstrated that with the India Equity Fund. In the last three years, it has been 80 percent in large caps and if you check the performance, it is there. So, to discount that these portfolios will not generate or will generate, it is a very generalised statement and in practice, it does not play out.

Would you be in the camp that instead of choosing sectoral or thematic funds, it is better to spread across the basket in terms of a large-cap fund which will choose the best of everything?

Mohanty: My advice would be to play it through the fund manager once you know what you want. It completely depends on the risk profile of investors. If the banks look good, the multi-cap fund will increase the allocation to banks. So, let the fund manager take the call for you. You look at a good basket and depending on your return projection, if you are looking for slightly higher return, then you can allocate higher to mid and small segment.

If your return expectation is within 12-13 percent, then the multi-cap and large-cap funds are there. If you are looking at an overall portfolio return of 15 percent going forward, then the lineage has to be more towards mid and small than it was in the earlier years.

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