Multicap funds gain currency as investors seek diversification

Schemes see highest flows in three years at ~2,400 cr in February

Net inflows into multicap mutual fund (MF) schemes, excluding collections by new fund offers, surged to a three-year high of ~2,400 crore in February. This indicates that investor interest may be shifting away from smallcap funds towards more diversified portfolios.

Multicap funds invest a minimum 25 per cent in large, mid and smallcap stocks. The other diversified category is flexicap but they mostly invest in largecaps.

“Multicap funds are a fair representation of the market as they have substantial allocation in each market cap (m-cap) segment. Since multicap funds now have a three-year track record and numerous offerings, they have emerged as one of the preferred options for a diversified exposure. This is across large, mid and smallcap stocks,” said B Gopkumar, managing director (MD) & chief executive officer (CEO), Axis MF.

“A lot of retail money is coming into multicap funds, mostly through systematic investment plans (SIPS). This category is unique as it gives nearly equal exposure to all the three m-cap segments. Given that these segments of the market go through their own market cycles, multicap funds give the true-blue exposure to the complete market,” said Saugata Chatterjee, chief business officer, Nippon India MF.

Although multicap MF schemes have always been there, the funds took their present form in 2020. This is when the Securities and Exchange Board of India (Sebi) notified new rules making it mandatory for multicap funds to invest at least 25 per cent in each m-cap segment.

The directive was followed by the introduction of a new category in flexicap. Most fund houses renamed their multicap funds as flexicap, leaving the multicap category with just 10 schemes with assets under management (AUM) of ~20,300 crore as of March 2021. The number of schemes has now swelled to 24 and the AUM has grown multi-fold to ~1.2 trillion (as of February 2024).

MFS have launched 6 schemes in the last one year. On an average, multicap funds have delivered 24 per cent annualised returns in the last three years vis-a-vis 19 per cent returns generated by flexicap funds.

The surge in inflows into multicap as well as flexicap schemes in the past few months coincides with a decline in investor interest in smallcap funds. In fact, smallcaps were cornering most of the flows in the calendar year 2023.

Net inflows into smallcap schemes, topped ~5,000 crore in June 2023 and averaged ~3,400 crore in 2023. They stood at ~2,900 crore in February 2024.

Most fund managers and analysts have been recommending investors to take a diversified investment approach through multicap and flexicap schemes. They said that while valuation comfort is there in largecaps, smallcap and midcap stocks have the potential to deliver strong earnings growth in the coming quarters.