Weekly Musings – NFO Pick (Edelweiss Multicap Fund)

25 Sep 2023 , 09:39 AM

In the latest weekly coverage on mutual fund NFOs, we cover the Edelweiss Multicap Fund. Originally, the multi-cap funds were the only form of amalgamated fund available in India. However, recently, the SEBI introduced the concept of flexi-cap funds to distinguish between funds with formula based investing and funds with discretion based investing. Multi-cap funds are more of a formula based investing, wherein the fund manager has to necessary allocate 25% to large caps, 25% to mid-caps and 25% to small caps with discretion available only on the last 25%. In India, as we shall see later, the total AUM of such multi-cap is around Rs90,000 crore, as reported in end August 2023. This is largely because much of the multi-cap fund AUM had gravitated towards flexi cap funds.

To begin with, an investor looking to grow wealth in the long term through a combination of stable large caps and alpha generating mid-caps and small caps can look to invest in the Edelweiss Multicap Fund. The fund is risky since there is the inherent risk of equities plus the risk of smaller stocks which are prone to be more cyclical. The basic exposure to equity will be kept at minimum 75% at all points of time. How will the fund define large cap, mid-cap, and small cap stocks. They will adhere to the SEBI definition. According to SEBI, such classification will be ranking based. Thus, the entire universe will be ranked on market cap . The top 100 companies will classify as large caps; the next 150 will classify as mid-cast and the rest of the stock will classify as small cap stocks.

Why equities, and why multi-cap equities in India?

There are several strong reason for choosing equity as an investment option in India. India has  huge share of young and independent population and this group is likely to drive demand for consumer goods as well as demand for long term wealth creating instruments to take care of their later years. Secondly, India is among the best placed among other major countries in terms of demographic dividends. Most of the other high growth stories in the world like Japan, Soth Korea, China and Brazil started their demographic dividends long back and it is about to end in the next 10-15 years. It is only in the case of India that the demographic dividends started in 2018 and is likely to go on all the way to year 2055. Between the current decade and the first half of the next decade, the number of high income groups will grow by 150%, the middle income group will grow by 60%, while the lower middle income and lower income groups will actually see a shrinkage. One can imagine the kind of potential it will unleash and its potential for equity markets. Also, digitization is opening up new industries and new opportunities at a rapid pace. 

So, why multi-cap funds? Investors need to be invested in large caps as they present the beta story of the Indian economy. They are from established groups and lend stability to the portfolio. At the same time, the small cap and mid-cap stocks tend to bring in the much needed alpha. These are companies with more focused business models, lower levels of debt and are poised to be large caps in the next few years. Hence, capital growth tends to be much higher in the small-cap and mid-cap stocks also because they are less tracked, unlike the large cap stocks. That is where a rule-based multi-cap strategy can come in handy for investors. It gives them the best of beta and alpha in the Indian markets.

Why a multi-cap based strategy is most likely to work for investors

Multi-cap is one of the mixed strategies, but provides the best balance with perfect balance between large and small stocks. This optimizes returns of the fund overall. Here is how various mixed strategies allocate assets.

• The benchmark mid-cap index has an allocation of 50% to large caps, 25% to mid-caps and 25% to small caps.
• The multi-cap fund category has an allocation of 37% to large caps, 27% to mid-caps and 27% to small caps.
• The flexi-cap fund category has an allocation of 61% to large caps, 18% to mid-caps and 13% to small caps.
• The Large and Mid-cap fund category has an allocation of 46% to large caps, 38% to mid-caps and 11% to small caps.
• The Nifty 500 index has an allocation of 75% to large caps, 16% to mid-caps and 9% to small caps.

It must be noted here that the multi-cap funds have beaten the large cap funds by a margin over the longer term and so even empirically it should work in favour of the investors.

Multi-cap strategy has wide coverage and less concentration

One of the advantages that a multi-cap strategy has is that it provides a wide variety of stocks across sectors. At the same time, it is not a financials concentrated portfolio like a typical large cap portfolio. Check out some details of the likely mix.

• Only banks and IT stocks are largely concentrated in the large cap space. If you look at the break up of the index in terms of other stocks in sectors like realty, industrial products, auto parts, healthcare and consumer durables, the companies are largely small cap and mid-cap stocks.
• A typical multi cap fund would reduce the portfolio concentration in banks and IT and enhance the share of sectors like finance, pharma, industrial products, auto components and chemicals.

How will the Edelweiss Multicap Fund portfolio look like?

It will be a multi-cap fund benchmarked to the Nifty 500 Multicap 50:25:25 TRI. 

1. The fund, as a multi-cap fund, will allocate at least 25% to each of the categories viz. large caps, mid-caps, and small caps. It is only for the balance 25% that the fund managed is allowed discretion, making it a more disciplined approach. The fund will lean towards approximately equal allocation to all categories. 

    

2. The large cap stock focus will be on proven leaders. It will look at companies that have delivered consistent high growth, have strong balance sheets, and run by good and solid managements with a sound track record. 

    

3. The mid-cap stock selection will be based on emerging giants characterized by good earnings growth, quality and profitable businesses, sound management and higher liquidity on the stock exchanges.

    

4. The small cap selection of the fund would be based on rising champions that aim to delivery earnings growth. These are the stocks most likely to benefit from an upturn in the economy cycle, with sufficient liquidity in the markets.

If you look at a 3 year time frame or a 10-year time frame, it is multi-cap funds that have delivered superior returns compared to other similar benchmarks like flexi-caps, large & mid-caps as well as the broad-based Nifty 500 index.

Key highlights of the Edelweiss Multicap Fund NFO

The Edelweiss Multicap Fund NFO is a mixed allocation fund between large caps, mid-caps, and small caps with minimum allocation of 25% to each category.

• The Edelweiss Multicap Fund NFO opened for subscription on October 04, 2023 and will close for subscription on October 18, 2023, both days inclusive. It is an open ended fund, but such a multi-cap fund is best poised to generate alpha over a longer holding period of 5-7 years and above.

   

• Edelweiss Multicap Fund is a combination of large cap, mid-cap, and small cap stocks with mandatory allocation of 25% of portfolio to each of these categories. Discretion of allocation is only for the last 25%. 

   

• The primary objective of the Edelweiss Multicap Fund is to provide long term capital appreciation  by investing in a mix of large cap, mid-cap, and small cap stocks to help investors plan for their long term financial goals. It tries to combined the beta stability of large caps with the alpha potential of small and mid-cap stocks.

   

• The Edelweiss Multicap Fund performance will be benchmarked to the Nifty Multi-cap Index 50:25:25 TRI index. However, the actual allocation of the fund would be towards a more balanced allocation between the three categories of funds. 

   

• There are no entry loads in India as per SEBI regulations. However, there will be an exit load of 1% if the fund is redeemed or switched out in 90 days from the date of unit allotment. There will not be any exit load if the fund is held beyond 90 days.

   

• NFO subscriptions in the Edelweiss Multicap Fund can be made in minimum lumpsum parcels of Rs5,000 and SIP parcels of Rs100 and both investments can be multiples of Rs1 thereafter. 

   

• The Edelweiss Multicap Fund will be managed by the veteran fund manager, Trideep Bhattacharya and his team. It is ranked high on the risk scale due to its exposure to equity as an asset class as well as its specific exposure to mid-caps and small caps.

The Edelweiss Multicap fund offers a good choice for the investor as it combines the beta facility of large caps with the alpha potential of small and mid-caps. In the current macro environment, this strategy should be apt from a long term perspective.

Understanding the Multi-cap Funds universe in India

Here is a cross section of the multi-cap funds available in India. We have covered the 1 year returns and the returns since inception. The CAGR returns since inception range from 20.4% on the upside to 11.4% on the downside with the median returns gravitating towards the range of 16% to 17%.

Scheme  Name	Return 1 Year (%) Direct	Return Since Launch Direct	Daily AUM (Cr.)
HDFC Multi Cap Fund	27.35	20.42	8,525.07
Quant Active Fund	12.11	20.39	6,007.05
Aditya Birla Sun Life Multi-Cap	17.73	18.62	4,472.98
Invesco India Multicap Fund	17.04	18.16	2,714.12
Mahindra Manulife Multi Cap	20.79	17.78	2,165.67
Sundaram Multi Cap Fund	14.04	16.50	2,095.11
Nippon India Multi Cap Fund	26.08	16.23	20,673.77
ICICI Prudential Multicap Fund	21.85	16.05	8,779.96
Kotak Multicap Fund	25.76	16.04	6,198.49
Baroda BNP Paribas Multi Cap	16.59	15.30	1,877.34
Bandhan Multi Cap Fund	19.72	15.20	1,533.37
ITI Multi Cap Fund	22.05	15.08	652.70
SBI Multicap Fund	11.03	14.16	13,211.74
Axis Multicap Fund	20.14	11.44	4,378.16

Data Source: AMFI

However, the overall AUM of this category of funds is just about Rs90,000 crore as of the close of August. That is more due to the shift to flexi-caps that many funds have undertaken. The Edelweiss Multicap Fund could be the right product at the right time for an investor looking at disciplined long term wealth creation.