Weekly Musings – NFO Pick (Franklin India Multi Cap Fund)

9 Jul 2024 , 09:38 AM

MULTI CAP FUNDS WHEN THERE ARE NO CLEAR WINNERS

The whole idea of multi cap funds comes from the fact that large cap funds, mid cap funds and small cap funds have done well at different points of time. However, for an investor, it is very hard to reasonably predict which category of stocks will do well at what point of time. That is where the multi-cap funds come to the rescue. Then combine large caps, mid-caps, and small caps in a structured and rule-based portfolio. Let us get back to the story of no clear winners.

• If you look at the data for the last 18 years between 2006 and 2023, you will find that the large caps have been the top performer in 7 out of these 18 years. However, large caps have also been the bottom performer among the three classes in 9 out of these 18 years. In the remaining 2 years the large caps were in second position.
• Let us now look at the same 18 years of data for the mid-cap stocks. Interestingly, the mid-caps have been the top performer in 3 out of these 18 years. However, these mid-caps have also been the bottom performer among the three classes in 1 out of these 18 years. In the remaining 14 years the mid-caps were in second position.
• Let us now look at the same 18 years of data for the small cap stocks. Interestingly, the small caps have been the top performer in 8 out of these 18 years. However, these mid-caps have also been the bottom performer among the three classes also in exactly 8 out of these 18 years. In the remaining 2 years the small caps were in second position.

That is a huge melee of numbers. But, the broad message is that winners rotate and while large caps handle the drawdown period better, it is the small cap and mid-cap stocks that give better returns in periods of high growth. That is the basis of a multi-cap strategy and that is the logic of the Multi Cap fund.

WHAT EXACTLY DOES THE MULTI CAP FUND COMBINE?

The simplistic answer would be that multi cap funds combine large cap, mid-cap, and small cap stocks. But that is not what they actually do from an investor perspective. Here is what is achieved through the multi-cap approach.

• The small and mid-cap stocks bring in alpha generation capabilities. However, to be able to identify such alpha generators, the need of the hour is a very robust stock selection framework and clear execution.
• The spread across large caps, mid-caps and small caps gives investors the opportunity to optimize the associated risks. The diversification is not only across capitalization, but even within capitalization, there is diversification across sectors and themes.
• The net result of enhanced returns and better risk management is higher risk adjusted returns. In short, these multi-cap funds give a much better chance to achieve higher levels of wealth creation in the long run.

When a professional fund management set-up runs this multi-cap fund, they are able to deliver capital allocation and risk optimization towards better risk adjusted returns.

HOW WILL THE FRANKLIN INDIA MULTI CAP FUND PORTFOLIO LOOK LIKE?

Here is the broad investing framework that the fund will follow to run the multi-cap fund at Franklin Templeton India.

• There will be a mandatory 25% allocation to large caps, 25% allocation to mid-caps and 25% allocation to small caps as per the AMFI definition updated half-yearly. The balance 25% is the discretionary corpus which will be invested based on the framework.
• The fund has identified a total of 22 sectors and themes across which the large cap, mid-caps and small cap stocks will be spread out to create the portfolio. These will include traditional themes and new generation themes.
• The diversification will be across multiple levels. There will be diversification across capitalization and across investing style. Within each class, there will be sectoral and thematic diversification as well as at the fund level. It will blend growth and value styles of investing with a bias in favour of bottom up stock picking.
• The last 25% will be discretionary, but even that allocation will be based on a set framework that has been back-tested. Such allocations will also be monitored on a continuous basis against the set goals.
• A part of the portfolio will be allocated to very opportunistic investments and could include overseas equities, REITS, INVITs etc.

Has the 50:25:25 combination outperformed the generic indices. According to a back-tested study, in terms of 3 year rolling performance, there is 69% probability of outperformance and over a 5-year rolling performance, there is 78% probability of outperformance. The longer, the better for a multi-cap strategy.

PERFORMANCE OF MULTI CAP  FUNDS IN INDIA

Here is a quick look at how the Multi Cap Funds have performed over a 1 year period, and since inception. One is a short term view and the others are a medium to long term view, depending on the time since inception. In all cases, we have considered the Direct Plans, to avoid the impact of fund costs skewing the output. Here are the 18 Multi Cap Funds in India managing a total corpus of ₹1,43,156 Crore. In the table below, we have ranked these funds on 1-year returns. The ranking below is on 1-year returns pertaining to Direct Plans.

Scheme Name	NAV Direct	Return (%) 1-Year	Returns (%) Launch	Daily AUM (₹ in Crore)
HSBC Multi Cap Fund	18.97	64.47	56.47	3,683.87
Kotak Multicap Fund	19.52	58.64	27.34	13,559.52
ITI Multi Cap Fund	27.26	57.98	21.52	1,322.12
Axis Multicap Fund	17.70	56.36	25.06	6,134.16
Quant Active Fund	782.06	56.18	22.77	10,933.61
LIC MF Multi Cap Fund	17.33	55.73	38.76	1,240.38
Bank of India Multi Cap Fund	17.86	55.44	54.04	615.63
Nippon India Multi Cap Fund	319.90	55.11	18.58	36,077.35
Mahindra Manulife Multi Cap Fund	40.29	54.50	21.50	4,227.07
HDFC Multi Cap Fund	19.67	52.52	30.01	15,962.80
Baroda BNP Paribas Multi Cap Fund	315.38	50.87	17.16	2,666.33
ICICI Prudential Multicap Fund	849.15	48.52	18.20	13,316.36
Invesco India Multicap Fund	148.98	48.37	20.22	3,697.65
Sundaram Multi Cap Fund	409.66	45.75	18.39	2,772.76
Bandhan Multi Cap Fund	17.66	44.84	24.53	2,349.03
Union Multicap Fund	15.91	44.64	35.06	1,034.42
Aditya Birla Sun Life Multi-Cap Fund	20.38	44.03	25.23	6,109.64
SBI Multicap Fund	16.20	39.24	23.01	17,452.94

Data Source: AMFI

The table above provides the performance of Multi Cap Funds over 1-year time frame, and since inception. Multi Cap Funds, unlike flexi cap funds, cannot allocate freely between large caps, mid-caps, and small caps. Multi cap funds need to maintain a minimum of 25% allocation to large caps, mid-caps, and small caps respectively. It is only in the balance 25% that the fund manager has allocation discretion. Here is a sneak peek at the top performers.

• Let us first look at the returns on Multi Cap Funds over a 1-year period. On a 1-year returns basis, these Multi Cap Funds  generated maximum returns of 64.47% and minimum returns of 39.24%, which is fairly impressive even in terms of lower quartile returns. Due to the limited discretion given to multi-cap fund managers, the dispersion has also been quite low in these fund returns over a 1-year period. The average returns over a 1 year period are 51.84%, which is very impressive. The limited discretion given to fund managers in allocation has actually pushed the risk-reward in favour of investors.
• Let us first look at the returns on Multi Cap Funds since inception. On a since inception returns basis, these Multi Cap Funds  generated maximum returns of 56.47% and minimum returns of 27.66%, which is relatively higher degree of dispersion in returns. However, that is understandable because when we talk of returns since inception, the period varies for different fund based on when they were launched. The average returns over a 5-year period are 17.16%, which is very impressive considering that these are compounded annual returns (CAGR). Dispersion in this segment on a 5-year basis is relatively high compared to the 1 year returns, but that is more due to the fluid definition of returns since inception.

Multi Cap funds used to be the core of equity allocation strategy in India. However, since the launch of flexi cap funds since 2020, many of the multi-cap funds transitioned into flexi9 cap funds for the same of allocation discretion. However, in the last two years, the interest appears to be returning to multi-cap funds as the allocation discipline is being seen as a merit. With equity market at all-time highs, a rule based allocation is a good choice.

GLANCE AT THE FRANKLIN INDIA MULTI CAP FUND NFO

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

1. The NFO of Franklin India Multi Cap Fund opened for subscription on July 08, 2024 and will close on July 22, 2024. Being an open-ended multi-cap equity fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The product is best suited to investors looking for long term capital appreciation with a diversified mix of large caps, mid-caps, and small caps.
2. On the Standard SEBI Risk-O-Meter, the Franklin India Multi Cap Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities that the Franklin India Multi Cap Fund will have. In addition, there is also the risk of entering the market at lifetime highs of the Nifty and the Sensex. There is also the risk of minimum 25% exposure to mid-caps and small caps; which tend to have larger drawdowns. The fund will be benchmarked for performance review to the Nifty 500 Multicap 50:25:25 Index TRI.
3. The Franklin India Multi Cap Fund is about combining the stability of large caps with the fleet-footedness of mid and small caps. The fund will run a portfolio that invests at least 25% of the corpus each in large caps, mid-caps, and small caps respectively; with discretion on allocation of the last 25%. However, the exposure to equity will be maintained between 80% and 100% at all times to adhere to the classification of an equity fund for tax purposes.
4. Investors can invest in the NFO of Franklin India Multi Cap Fund in minimum size of ₹5,000 and in multiples of ₹1 thereof. Minimum additional purchases will be of ₹1,000 and the minimum redemption will also be of ₹1,000. This also applies to switch-ins during the NFO. The fund also supports the systematic investment plans (SIPs) and systematic transfer plans (STPs) with the minimum allocation being ₹500 per instalment.
5. While there is no entry load, there will be conditional exit load. If the funds are redeemed within 1 year from the date of allotment, it will subject to 1% exit load. There will be no exit load beyond 1 year. However, apart from the prescribed exit loads; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the multi-cap approach of the Franklin India Multi Cap Fund.
6. The Franklin India Multi Cap Fund does not give any guarantee on returns, being an equity oriented fund. The fund managers for the fund will be R Janakiraman, Kiran Sebastian, and Akhil Kalluri (for the domestic allocation), and Sandeep Manam ( for the international allocation portion). Anecdotal evidence tells us that there is a chance that fund managers may not succeed in outperforming the benchmark.
7. The Franklin India Multi Cap Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer the dividend payout option, and the dividend reinvestment option too. The Franklin India Multi Cap Fund will offer investment via the Regular Plan as well as through the Direct plan.
8. The Franklin India Multi Cap Fund will be classified as an equity fund for tax purposes; as long as its equity exposure is above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains. Any dividends declared by the fund and paid will be subject to tax at the incremental rate of tax and the fund shall deduct TDS on such dividends, as applicable.

The Franklin India Multi Cap Fund NFO offers an opportunity for investors invest in a fund that offers a combination of large caps, mid-caps, and small caps in a predominantly rule-based fashion. It draws a trade-off between stability, aggressive growth, returns and hedging downside risk.