Weekly Musings – NFO Pick (Motilal Oswal Multi Cap Fund)

21 May 2024 , 08:16 AM

WHAT EXACTLY ARE MULTI-CAP FUNDS

Multi-cap funds are a combination of large caps, mid-caps, and small caps. About 3 years back, SEBI introduced the category of flexi-cap funds to segregate the funds that gave absolute discretion to the fund managers to mix across capitalization. The multi-cap funds are more rule based; in that they must maintain a minimum exposure of 25% each to large caps, mid-caps, and small caps. The balance 25% is where the fund manager has discretion. One of the main reasons for multi-caps is that different themes outperform at different points of time. For example, value outperformed growth between 2002 and 2007 while growth outperformed value between 2010 and 2015. Again, it is value that has outperformed growth between 2020 and 2023. These kind of return variations cannot be predicted, but can be best captured with the help of formula-based multi-cap funds. Unlike flexi cap funds, these multi-cap funds limit the extent of discretion to fund managers.

CASE FOR INVESTING IN MULTI-CAP FUNDS

Is there an eminent logic in investing in multi cap funds? In fact, there are several reasons for investors to consider a multi-cap fund.

• If you look at the array of stocks in the market; sectors like oil & gas, IT banks are spread across large-caps, mid-caps, and small caps. However, insurance and automobiles are predominantly large cap players. If you look at semiconductors and entertainment, they are only available in small caps, while building products, machinery and biotech are only available across mid-caps and small caps. Multi-caps can offer the best mix of all these.
• What about performance. Over the last 17 years, large caps have outperformed in 7 years while small caps outperformed in 7 years. In the remaining 3 years, it was the mid-caps that outperformed. More importantly, the real value is in migration to a higher cap. For example, 27 stocks that migrated from small caps to mid-caps gave median CAGR returns of 35%, while for 13 stocks migrating from mid-caps to large caps, it was 17%.
• Multi-cap funds give the best balance across large caps, mid-caps, and small caps. If you look at flexi-cap funds and focused funds, they are largely into mid-caps while Large & Mid cap funds live up to their name. Multi-cap funds, on the other hand, maintain a ratio of 39:26:29 between large caps, mic-caps, and small caps.
• In the last 10 years, the multi-cap funds have outperformed the multi-cap index on 8 out of the last 10 years. The key to the outperformance lies in diversification and rebalancing of the portfolio, as against a static approach. So, it is not just the mix, but the stock selection matters too.

Let us now look at why an SIP approach would work best for the Motilal Oswal Multi Cap Fund.

WHY THE SIP APPROACH WOULD WORK BEST FOR THE FUND

It must be noted that mid-caps and small caps show larger drawdowns in a falling market. For a SIP, that would mean more units at lower NAVs and would work in favour of cost holding of such funds. Also, when invested at a market high, the multi-cap funds have given 14.2% CAGR in SIP but just 11.3% CAGR in lumpsum investments. Also, in the last 15 years, if you take phases when the lumpsum returns on multi-cap were zero, the SIP approach gave positive returns of between 10% and 38% in the next 5 years. However, the SIP is observed to work best when the time frame is 7 years and above.

PERFORMANCE OF MULTI CAP FUNDS IN INDIA

Here is a quick look at how multi cap funds in India have performed over different time frames. We have considered 2 time frames viz. 1-year and since inception. We have considered the Direct Plan returns in all the cases to exclude the impact of the total expense ratios (TER) as these are formula based funds. We have not considered 3 year and 5 year returns as the data was not fully available for majority of the funds. Ranking of the table below is on 1-year returns and all returns pertain to Direct Plans.

Scheme Name	NAV (₹)	Returns (%) 1-Year	Benchmark (%) 1-Year	Returns (%) 1-Year	Benchmark (%) 1-Year	Daily AUM (₹ in Crore)
HSBC Multi Cap Fund	17.22	61.32	45.52	52.09	39.13	3,080.31
Kotak Multicap Fund	17.80	60.17	45.52	24.49	17.65	11,414.25
ITI Multi Cap Fund	24.57	56.93	45.52	19.65	22.23	1,141.14
Nippon India Multi Cap Fund	292.03	54.18	45.52	17.87	17.87	31,211.38
Quant Active Fund	718.67	53.22	45.52	22.16	22.16	9,832.01
Mahindra Manulife Multi Cap Fund	36.21	52.30	45.52	20.11	16.10	3,548.27
Bank of India Multi Cap Fund	16.26	50.83	45.52	49.53	42.33	510.22
Axis Multicap Fund	15.72	50.43	45.52	20.56	18.93	5,361.26
HDFC Multi Cap Fund	17.67	49.41	45.52	26.23	19.27	13,650.25
ICICI Prudential Multicap Fund	783.80	48.21	45.52	17.61	17.61	12,143.95
Baroda BNP Paribas Multi Cap Fund	289.09	48.00	45.52	16.49	16.49	2,464.34
LIC MF Multi Cap Fund	15.05	45.67	45.52	30.27	28.78	1,031.00
Invesco India Multicap Fund	135.11	44.60	45.52	19.45	14.40	3,345.86
Bandhan Multi Cap Fund	16.19	43.47	45.52	21.67	18.90	2,106.34
Sundaram Multi Cap Fund	374.40	42.50	45.52	17.69	17.69	2,546.48
Union Multicap Fund	14.46	42.04	45.52	29.87	29.54	911.52
Aditya Birla Sun Life Multi-Cap Fund	18.49	40.18	45.52	22.49	23.01	5,579.94
SBI Multicap Fund	14.80	35.50	45.52	19.56	26.36	15,898.66
Tata Multicap Fund	13.59	31.28	45.52	26.93	38.93	2,889.09

Data Source: AMFI

In the table above provided the performance of multi-cap funds across 1-year time frame and since inception. We have also provided the benchmark returns, which are calculated for multi-cap funds in the ratio of 50:25:25 between large cap, mid-cap, and small cap funds. However, multi cap funds often tweak more in favour of mid cap and small cap funds, in which there returns could be higher. The outperformance of funds over the multi cap benchmark could be partially due to stock selection and partially due to weighting of stocks. However, they still do provide a good benchmark to compare at a macro level. There are a total of 19 multi-cap funds in India managing a total AUM of ₹1,28,666 Crore, and Motilal Oswal Multi Cap Fund NFO comes at a time when all the 3 indices viz. large cap index, mid cap index and the small cap index are trading at their peak levels.

• Let us first look at the returns on multi-cap funds over a 1-year period. On a 1-year returns basis, multi cap funds generated maximum returns of 61.32% and minimum returns of 31.28%, showing wide variations in performance. The average returns over a 1 year period are 47.91%, which is impressive. Dispersion in this segment could be attributed to the mix of large caps, mid-caps, and small caps.
• Let us quickly look at how these multi-cap funds performed versus the benchmark? Benchmark returns over 1 year were 45.52% on an average, so the average returns on multi-cap funds was better than the benchmark by a little over 200 bps. What is more important is that 12 out of the 19 funds gave returns better than the benchmark, while only 7 funds lagged the multi cap index on a TRI basis.
• Let us turn to the returns on multi-cap funds since inception. On an inception returns basis, multi cap funds generated maximum returns of 52.09% and minimum returns of 16.49%, showing wide variations in performance. The average returns since inception were 24.98%, which is impressive. Dispersion in this segment could be attributed to the ratio in which large caps, mid-caps, and small caps are combined
• How did multi-cap funds performed versus the benchmark since inception? Benchmark returns since inception were 23.55%, so the average returns on multi-cap funds was better than the benchmark by a little over 140 bps. What is more important is that only 7 out of the 19 funds gave returns better than the benchmark, while only 12 funds lagged the multi cap index on a TRI basis since inception.

The multi-cap funds at this juncture are a combination of 3 indices that are at their peaks. Hence, more than a lumpsum investing approach, it is the SIP approach that would work better for investors.

GLANCE AT THE MOTILAL OSWAL MULTI CAP FUND NFO

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

a. The NFO of Motilal Oswal Multi Cap Fund opens for subscription on May 28, 2024 and will close on June 11, 2024. Being an open-ended equity based fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. While the fund has no lock-in period (other than exit load disincentive), it is best to hold such multi cap funds for a period of 5 years or more to get full benefits of multiple cycles.

b. On the Standard SEBI Risk-O-Meter, the Motilal Oswal Multi Cap Fund will be ranked as a Very High Risk Fund. The high risk is due to the predominant exposure to equities that the Motilal Oswal Multi Cap Fund will have. In addition, there is also the risk of entering into the fund when the market is at all-time high levels. Above all, the focus of the fund will be predominantly on the mix of large caps, mid-caps, and small caps.

c. The Motilal Oswal Multi Cap Fund is about long term capital appreciation with a focus on large, mid, and small cap stocks. This theme has been observed to outperform the Nifty in India over longer time frames. However, one risk to be conscious of is that small cap and mid cap stocks tend to have larger drawdowns when the markets are falling and also tend to be more volatile than large caps, as well as higher on the risk scale.

d. Investors can invest in the NFO of Motilal Oswal Multi Cap Fund in minimum size of ₹500 and in multiples thereof. This also applies to switch-ins during the NFO while additional purchases can be of a lower amount. There will be an exit load of 1% on the fund subject to the investors redeeming the funds within 15 days of allotment. There is no exit load beyond 15 days. However, investors are advised to hold multi-cap funds for a minimum period of 5-7 years to get full benefits of the capitalization combination.

e. The Motilal Oswal Multi Cap Fund does not give any guarantee on returns, being an equity oriented fund. The fund will have to keep a minimum of 25% each in large caps, mid-caps, and small caps. The balance 25% is where the fund manager has full discretion. This can be invested in large caps, mid-caps, small caps or even in debt. However, the fund will keep equity exposure in excess of 85% to 90% at all times.

f. The Motilal Oswal 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 dividend payout and the dividend reinvestment option. The Motilal Oswal Multi Cap Fund will offer investment via the Regular Plan or through the Direct plan. The NAVs on redemption will be different for regular plans and direct plans based on TER.

g. The fund is best suited for investors with a higher risk appetite and ability to stay invested for 5-7 years in equities. Investors in Motilal Oswal Multi Cap Fund NFO must be prepared for the additional risk of small and mid-cap stocks. The benchmark index assumes 50:25:25 mix, so outperformance may not be due to mix or stock selection.

h. The performance of the Motilal Oswal Multi Cap Fund will be benchmarked to the underlying Nifty 500 Multi Cap 50:25:25 TRI. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. Benchmark will used to evaluate fund performance. The fund managers for the Motilal Oswal Multi Cap Fund Ajay Khandelwal, Atul Mehra, and Niket Shah.

i. The Motilal Oswal Multi Cap Fund will be classified as an equity fund for tax purposes; with its equity exposure decisively above 65%. The short term capital gains (held for less 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.

The Motilal Oswal Multi Cap Fund NFO is an opportunity for investors to participate in a portfolio of large cap, mid-cap, and small cap stocks in a rule-based manner. Considering the current valuations, an SIP approach would be the best way to take an exposure in the Motilal Oswal Multicap Fund NFO.