Weekly Musings – NFO Pick (DSP Multicap Fund)

31 Dec 2023 , 08:23 AM

What exactly are multi-cap funds?

The multi-cap funds have been around in India for a long time. However, in 2020 SEBI felt  that the concept of multi-cap funds needed a finer delineation. That reasons were not far to seek. The general belief is that multi-cap funds would use a formula to mix large caps, mid-caps, and small caps. However, in reality, these multi-cap funds were predominantly large cap funds due to the liquidity and only a small portion of the assets were put in small cap and mid cap funds. The argument was that liquidity was not available in mid-cap and small cap stocks to enable an equal portfolio apportionment. That is when SEBI decided to change the rule to make the name more representative.

In 2020, SEBI introduced a new class of mutual funds called flexi-cap funds. Here are how the multi-caps were defined post the delineation. Any multi-cap fund had to be a formula based allocation at a macro level. For example, it was stipulated that a multi-cap fund must have at least 25% allocation to small caps, mid-caps, and large caps. The balance 25% is where the fund managers were allowed discretion in allocation. However, if the fund managers wanted any more freedom than that, they had to christen it as a flex-cap fund. In short, the name had to be indicative of what the investors expect from the fund.

How Multi-Caps and Flexi Caps are conceptually different?

It is easy to get confused between multi-caps and flexi-cap funds since their basic asset structuring and benchmarking is the same. The difference is in the quantum of discretion given to the fund manager. For instance, in the case of a flexi cap fund, the fund manager has full discretion and can decide the mix of large caps, mid-caps, and small caps without any inhibiting rules. Technically, the flexi cap fund can even invest up to 70% in large caps or mid-caps or small caps, based on the perspective and conviction of the fund manager and the investment committee. As the name suggests, flexi cap investing is all about flexibility in investing and in asset allocation. The fund manager is free to allocate across cap classes.

In contrast, the multi-cap fund is more structured in its portfolio mix and more rule based in its allocation of funds. The first condition in any multi-cap fund is that, not less than 75% of the total corpus must be mandatorily invested in equities. There is an additional requirement to qualify as a multi-cap funds. It is also necessary that the multi-cap fund must have minimum exposure of 25% to large caps, 25% to mid-caps and 25% to small caps at any point of time. This should be the allocation formula at all the regular review dates for the portfolio of the fund. Once the 75% condition is met, then the fund manager has the discretion on the balance 25%. The balance 25% funds can either be allocated to large caps, mid-caps or small caps within equity or it can also be invested outside of equity in other relevant asset classes. Such discretion is only available on 25% of the portfolio.

Investment allocation of the DSP Multi-Cap Fund NFO

The DSP Multi-Cap Fund NFO, as discussed earlier, will invest the corpus across a portfolio of large caps, mid-caps, and small caps, while maintaining the minimum 25% exposure to each category. So, 75% of the portfolio will have to be formula based and also maintain the 1:1:1 ratio between large caps, mid-caps, and small caps. The intent of the DSP Multi Cap Fund is to provide long-term capital appreciation by investing in a portfolio predominantly of Indian equity and equity related securities of large cap, mid cap, and small cap companies. The general practice is that; fund managers adopt a bottom-up approach for selecting mid-cap and small cap stocks while they typically use the EIC (Economy, Industry, Company) based top-down approach for the selection of large cap stocks.

• The DSP Multi-Cap Fund NFO will invest across large-caps, mid-caps, and small caps, keeping the basic 25% exposure in place. For the purpose of defining what are large caps, mid-caps, and small caps; the fund will rely on the standard SEBI definition and the AMFI list supplied every six months. In other words; the top 100 companies by market cap will be large caps, 101 to 250 will be mid-caps and all stocks from rank 251 and beyond will classify as small caps. Normally, such companies do not go for very small companies where liquidity could be an issue.

   

• The DSP Multi-Cap Fund has to mandatorily maintain 75% exposure to equity with a 25% each minimum distribution across large caps, mid-caps, and small caps. The balance 25% can be either deployed in debt and other assets or it can be invested in one of the capitalization categories at the discretion of the fund manager. The fund may also, from time to time, use derivatives as a proxy for equities to enhance returns or to hedge risks.

   

• In terms of risk return matrix, the DSP Multi-Cap Fund would classify as a high risk fund. The fund has risks at multiple levels. At the first level, there is the systematic risk of factors that impact the market as a whole. At the second level, there is the issue of risks at a company and industry-specific level. Thirdly, there is the stock selection discretion risk. Last, but not the least, there is also the thematic risk since this fund is based on a theme of mixing large caps, mid-caps, and small caps. As a result, in the short to medium term, the NAV of the fund can also be highly volatile; and even occasionally subject to negative returns over prolonged periods of time.

   

• In terms of suitability, the DSP Multi-Cap Fund NFO would be suited for investors with an investment horizon of 5 years and above. Generally, equity itself is a long term game and more importantly, mid-caps and small caps are surely a longer term game. In the case of small caps, the success ratio is also relatively low, so even that has to be factored into the calculations. It is only over a longer time frame that equities, as an asset class, tend to outperform other asset classes. In fact, empirical data suggests that if a diversified equity portfolio is held for a period of 7 years or more; then the chances of negative returns are almost close to zero. 

   

• In terms of taxation, multi-cap funds are classified as equity funds, and so they will be taxed as equity funds. In the case of the DSP Multi-Cap Fund NFO, dividends will be fully taxed in the hands of the investor and will also attract TDS by the fund at the extant rates. If the multi-cap fund is held for less than 1 year, it would classify as short term capital gains (STCG) and will be taxed at the rate of 15% plus appropriate surcharge. If units are held for more than 1 year, it will classify as long term capital gains (LTCG) and taxed at a flat rate of 10%, after the base LTCG exemption limit of Rs1 lakh per annum is exhausted. Equities are taxed on LTCG at flat rates, so there is no indexation allowed. To classify as equity fund, the multi-cap fund has to maintain 65% exposure to equities.

Multi-cap funds are a high risk means of participating in equity markets. However, in the Indian context, mid-caps and small caps have historically generated alpha for investors. That means; the higher risk also comes with the prospects of higher returns.

Performance of multi-cap funds and flexi cap funds in India

Here is a quick look at the best performing multi-cap funds and flexi-cap funds ranked on returns since launch on direct plans.

Multi-Cap Funds	Return 1 Year (%) Direct	Return Since Launch Direct	Daily AUM (Cr.)
Union Multicap Fund	33.64	30.16	747.48
LIC MF Multi Cap Fund	32.98	27.02	809.47
HDFC Multi Cap Fund	41.93	25.43	11,017.18
Kotak Multicap Fund	41.89	21.40	8,073.98
Quant Active Fund	26.30	21.26	7,215.28
Aditya Birla Sun Life Multi-Cap Fund	29.94	21.05	4,932.29
Bandhan Multi Cap Fund	31.66	19.48	1,803.01
Mahindra Manulife Multi Cap Fund	36.40	19.17	2,662.64
Invesco India Multicap Fund	33.52	19.08	3,035.86
ITI Multi Cap Fund	41.14	18.00	785.46
Axis Multicap Fund	38.31	17.56	4,751.03
Sundaram Multi Cap Fund	32.56	17.40	2,331.09
SBI Multicap Fund	23.63	17.18	14,271.20
ICICI Prudential Multicap Fund	36.48	17.00	10,341.05
Nippon India Multi Cap Fund	39.15	16.83	24,409.90
Baroda BNP Paribas Multi Cap Fund	32.13	15.51	2,127.27
Flexi Cap Funds	Return 1 Year (%) Direct	Return Since Launch Direct	Daily AUM (Cr.)
Bank of India Flexi Cap Fund	39.67	35.64	554.84
WhiteOak Capital Flexi Cap Fund	33.29	27.03	2,900.68
Invesco India Flexi Cap Fund	35.73	22.01	1,310.68
Baroda BNP Paribas Flexi Cap Fund	29.44	21.84	1,265.85
Quant Flexi Cap Fund	31.58	20.31	2,778.06
Sundaram Flexi Cap Fund	26.25	20.29	2,153.95
Parag Parikh Flexi Cap Fund	37.64	20.20	52,050.53
ICICI Prudential Flexicap Fund	29.30	19.23	13,529.61
JM Flexicap Fund	41.55	18.17	1,211.67
Nippon India Flexi Cap Fund	34.89	17.97	5,730.75
Motilal Oswal Flexi Cap Fund	32.08	17.58	8,880.17
Franklin India Flexi Cap Fund	31.81	17.22	13,788.72
Aditya Birla Sun Life Flexi Cap Fund	26.99	17.06	19,344.92
Kotak Flexicap Fund	25.31	17.03	44,568.53
HDFC Flexi Cap Fund	31.45	16.75	45,988.13
SBI Flexicap Fund	23.88	16.69	19,695.00
Mahindra Manulife Flexi Cap Fund	33.23	16.09	1,159.21
Navi Flexi Cap Fund	26.53	16.03	244.39
DSP Flexi Cap Fund	33.56	15.98	10,071.17
Tata Flexi Cap Fund	29.48	15.83	2,648.81
HSBC Flexi Cap Fund	32.84	15.52	3,979.22
Canara Robeco Flexi Cap Fund	24.31	15.20	11,491.22
PGIM India Flexi Cap Fund	21.66	15.18	6,093.26
Shriram Flexi Cap Fund	28.79	15.04	71.33
UTI Flexi Cap Fund	20.73	15.01	26,284.66
Axis Flexi Cap Fund	21.44	14.83	11,478.96
Bandhan Flexi Cap Fund	25.35	14.82	6,691.23
Edelweiss Flexi Cap Fund	31.38	14.76	1,546.70
Union Flexi Cap Fund	28.97	14.23	1,857.42
LIC MF Flexi Cap Fund	27.13	11.55	930.84
Taurus Flexi Cap Fund	26.95	10.93	316.97
Samco Flexi Cap Fund	26.96	10.13	777.72

Data Source: AMFI India

Currently, multi-caps manage around Rs1 trillion while flexi-caps manage around Rs3.21 trillion in terms of AUM. If you look at the performance, all funds have given positive returns over a 1 year period and since inception; largely due to the outperformance of mid-cap and small cap stocks. If you look at multi-cap funds, they have given CAGR returns since inception of 20.22% on an average, which is extremely impressive. On the other hand, flexi cap funds have given returns of 17.38% on an average. The reason is that there is lot more variation in the returns on flexi-cap funds. It is not surprising that a lot of the net inflows into funds is gravitating towards multi-caps than towards flexi caps.

Glance at the DSP Multi-Cap Fund NFO

Here are some details of the DSP Multi-Cap Fund NFO you must know to decide on investing in the fund.

1. The fund opened for subscription on January 08, 2024 and the NFO subscription will close on January 24, 2024. 

    

2. The DSP Multi-Cap Fund NFO offers an opportunity to investors to diversify across capitalization classes through a structured allocation approach.

    

3. Entry loads do not exist in India, but if the fund is redeemed within 365 days from the date of allotment, it will attract an exit load of 1%. There will be no exit load after that.

    

4. The minimum investment in the DSP Multi-Cap Fund NFO would be Rs100 in the NFO and in multiples thereafter. 

    

5. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option.

    

6. How will the fund be benchmarked? It will be benchmarked Nifty 500 Mult-Cap Index with 50:25:25 ratio-based TRI. Here TRI refers to the Total Returns Index.

The DSP Asset Multi-Cap Fund NFO is an opportunity to benefit from a structured equity portfolio of large caps, mid-caps, and small caps over the long term.