Mutual Funds: 3 AMCs have launched multi-cap fund NFOs recently: Should you invest?

During the August – September period, three AMCs have launched multi-cap funds. Apart from these, several other multi-cap funds from various AMCs already exist. In the last three years, the multi-cap category assets under management (AUM) have grown from over Rs. 24,000 crores to over Rs. 1,50,000 crores. The AUM has grown more than six-fold growth at an 85% CAGR. So, what are these multi-cap funds, how have they performed, and should you invest in them? Let us discuss.

What are multi-cap mutual funds?

A multi-cap mutual fund has to invest a minimum of 75% of its total assets in equity and equity-related instruments. The 75% investment must be as follows:

• 25% in large-cap companies,
• 25% in mid-cap companies, and
• 25% in small-cap companies

The fund manager can deploy the remaining 25% of the scheme money at their discretion. So, a multi-cap fund gives you a minimum of 25% exposure to each category (large, mid, and small-cap equity) within a single mutual fund scheme. In the multi-cap category, an investor can choose from active and passive funds.

In the active category, you will get at least 25% exposure to each equity category: large, mid, and small-caps. The fund manager has the flexibility to deploy the remaining 25% corpus across these equity categories, other asset classes, cash, or a combination of these. For example, PGIM India Mutual Fund has recently (NFO from 22nd August to 5th September 2024) launched PGIM India Multicap Fund (active fund).

Within the passive category, you can choose from multi-cap ETFs and index funds. For example, HDFC MF has launched the HDFC Nifty500 Multicap 50:25:25 Index Fund, an index fund – NFO period 6th to 20th August 2024. 

Similarly, Mirae Asset MF has launched Mirae Asset Nifty500 Multicap 50:25:25 ETF, an ETF – NFO period from 12th to 26th August 2024. For both the passive funds (HDFC and Mirae Asset MF) and the active fund (PGIM India MF), the benchmark index is the Nifty500 Multicap 50:25:25 Index. So, let us understand what this index is, its composition, performance, etc.

What is the Nifty500 Multicap 50:25:25 Index?

The Nifty500 Multicap 50:25:25 Index comprises of the following 500 stocks:

• 100 large-cap companies (ranked 1st to 100th as per market capitalisation)
• 150 mid-cap companies (ranked 101st to 250th as per market capitalisation)
• 250 small-cap companies (ranked 251st to 500th as per market capitalisation)

So, the Nifty500 Multicap 50:25:25 Index gives you exposure to India’s top 500 listed companies as per market capitalisation. The weightage of the companies in the index is as follows:

• Large-cap companies: 50% weightage
• Mid-cap companies: 25% weightage
• Small-cap companies: 25% weightage

Within each segment, the weightage assigned to each company is based on its free float market capitalisation. For example, the 50% weightage of the large-cap companies is divided among the 100 companies based on each company's free float market capitalisation. The same applies for the 25% weightage distribution of the 150 mid and 250 small-cap companies.

Depending on the performance of the large, mid, and small-cap segments, the 50:25:25 ratio will change. For example, if the large-cap segment does better than the other two segments, the weightage of the large-cap segment will increase above 50% and that of mid and small-cap will go below 25% each. The index is rebalanced on a quarterly basis. It means that on a quarterly basis, the weightage of large, mid, and small-cap segments is reverted to the base ratio of 50:25:25.

Now that we understand the Nifty500 Multicap 50:25:25 Index and its composition, let us look at its performance.

How has the Nifty500 Multicap 50:25:25 Index performed?

The index has a base date of 1st April 2005 and a base value of 1,000. As of 6th September 2024, the index is trading around levels of 16,471. The index has given a return of 17.09% CAGR since its inception. These are good returns.

(Source: https://www.niftyindices.com/Factsheet/Factsheet_Nifty500_Multicap_50_25_25_index.pdf)

Note: The above data is as of 30th August 2024.

The above chart shows how the index has multiplied more than 16 times in the last 19 years and created wealth for its investors.

After seeing the good individual performance of the Nifty500 Multicap 50:25:25 Index, let us compare its performance with the Nifty 500 and Nifty 50 indices.

Source: Mirae Asset Nifty500 Multicap 50:25:25 ETF presentation

Note: The above data is as of 31st July 2024

The data above shows how the Nifty500 Multicap 50:25:25 Index has outperformed the Nifty 500 and Nifty 50 indices across all investment horizons.

Why should one consider investing in a multi-cap fund?

Among the large, mid, and small-cap segments, one segment hasn't consistently outperformed the other two. Among the three segments, winners keep rotating year after year. Hence, investors may consider taking exposure to all three segments.

Source: HDFC MF – Multicap index fund presentation

Note: The above data is as of 25th July 2024.

The above chart shows, how in the last 19 years:

• The large-cap category was the best performer in 6 years
• The mid-cap category was the best performer in 4 years and
• The small-cap category was the best performer in 9 years

However, there is no clear pattern or consistency of any segment outperforming the other two. Hence, investors may want to take exposure to all three segments through a multi-cap fund.

If you want to take exposure to all sectors of the economy, one segment will not provide the same. For example:

• Large-cap segment can provide you exposure to listed companies in sectors like automobiles, oil & gas, FMCG, etc. However, mid and small-cap segments provide low to no exposure to these sectors.
• Mid-cap segment can provide you exposure to listed companies in sectors like fertilisers & agro-chemicals, fintech, realty, etc. However, large and small-cap segments provide low to no exposure to these sectors.
• Small-cap segment can provide you exposure to listed companies in sectors like paper, healthcare equipment, household products, etc. However, large and mid-cap segments provide no exposure to these sectors.

Hence, if you wish to have a diversified portfolio spread across all sectors through a single scheme, consider investing in a multi-cap fund.

Should you invest in the Nifty500 Multicap 50:25:25 Index?

Some of the benefits of investing in the Nifty500 Multicap 50:25:25 Index include the following:

Diversification across segments and sectors

It gives you exposure to a diversified portfolio of India’s top 500 companies, including large-cap (50%), mid-cap (25%), and small-cap (25%) segments spread across sectors all through a single scheme.

Rebalancing with tax-efficiency

Suppose you take exposure across the large, mid, and small-cap segments through three separate schemes. You will have to do the rebalancing manually. It will involve redeeming the units of one scheme and buying schemes of another. Redemption of units will have capital gain tax implications. However, in the Nifty500 Multicap 50:25:25 Index, the portfolio rebalancing is done quarterly. When the fund manager does it internally within the scheme, there are no capital gain tax implications for the investor.

Returns

As seen in the earlier sections, the Nifty500 Multicap 50:25:25 Index has given good returns in the past on a standalone basis, as well as compared to the Nifty 500 and Nifty 50 indices. However, the past performance is no guarantee of future returns.

While investing in the Nifty500 Multicap 50:25:25 Index has the above benefits, there are risks involved. It being an equity fund, it is meant for investors with a high-risk appetite. You should work with a qualified and experienced financial advisor who can do comprehensive financial planning for you and make a roadmap to achieve your financial goals. Based on your risk profile and other parameters, they can guide you on whether and how much to invest in active or index funds that can give you exposure to the Nifty500 Multicap 50:25:25 Index.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.