In the previous chapter, we covered the equity scheme and some of its subcategories. This chapter will build on that discussion.
Multi-cap funds offer the advantage of diversification, as their fund managers are free to pick stocks from anywhere in the market. There is no predefined requirement for a particular type of market capitalization; with a limit of 65% equity and related instruments, the manager is able to freely pursue whatever opportunities they think will be beneficial. Therefore, you can expect a multi-cap fund to represent a diversified portfolio within such boundaries.
Examine the collection of investments in SBI’s Multicap fund.
The portfolio of SBI multi-cap fund includes companies of different sizes, from HDFC Bank Ltd to the lesser-known UFO Moviez Ltd; their respective investments are decided by the Fund manager. The capital allocation for this selection is also overseen by the fund manager.
Given its diversified nature, the fund is often benchmarked to the S&P BSE 500 index or Nifty 500 index. These indices comprise the top 500 companies according to their market capitalization.
Considering the multi-cap fund is composed of different market capitalizations, it can be expected to bring in higher returns. However, such high prospects come with a greater risk. To illustrate, here are the 10 year returns of a multi cap fund –
You can observe that the returns are approximately 10 – 11%, with the least being 7.36% and the highest reaching 16%.
The AMC is a formidable asset collector, with its multi-cap funds driving the acquisition of huge amounts. We must ask ourselves: what will be the result of such an influx of resources?
As the asset size increases, this fund needs to invest in stocks. Unfortunately, there isn’t a high level of liquidity in India’s small-cap market, so the fund is limited to investing in large and mid-cap spheres.
Due to its expanding asset base, a multi-cap fund has similar traits as a large and mid-cap fund. This could be the reason why SBI Multicap Fund (AUM of 8.5K Crore) has quite a sizable percentage of its investments in large-cap stocks – around 70%.
When investing in a multi-cap fund, it is essential to bear in mind the potential ‘fund manager’ risk. The success of these funds relies heavily on the stocks that have been invested in and how much has been allocated, both of which are determined by the fund manager.
If you are new to mutual funds and unsure which to invest in, I recommend starting with a multi-cap fund – this is like ordering a little bit of everything at a buffet.