Do multi-caps have an edge?

It has been a fantastic year for the stock markets, no doubt, but what’s more spectacular is its all-round performance. Many stocks of all market capitalisations— giant, large, mid and small—have landed investors fabulous returns.

Take a look at the major stock indices: the Sensex surged 41.38 per cent over the year, the BSE Mid-Cap Index increased 49.5 per cent and the BSE Small Cap rose 58.36 per cent. Backed by this performance, the multi-cap funds—funds that invest in stocks of all market capitalisations— should have had done very well for themselves.

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But that’s not the case. Multicap funds, at best, performed at par with the overall market. Despite their names, multi-cap funds are a part of the diversified category, investing in all market capitalisations and sectors. Says Amar Pandit, CFP, My Financial Advisor: “Though diversified funds are not called multi-cap funds, many of them have exposures to mid- and small-cap funds.” However, diversified funds usually invest mostly in large cap stocks due to their stability.

Of the 170 diversified funds with a oneyear performance track record, the multi-cap funds don’t feature among the top 97. On average, diversified funds returned 47.35 per cent, but no multi-cap fund has bettered that average.

For a segment that had the entire canvas of the stock market to invest in, the performance seems lacklustre. Says Pandit: “Multi-cap funds have put up an average performance.”

One key strategy to bag outperformance is asset allocation. While multi-cap funds can invest in all categories of companies, most have restricted their mandate of investment in the small- and midcap stocks to less than 40 per cent. For instance, DBS Chola Multi-Cap Fund caps its investment in smalland mid-cap stocks to 40 per cent of its corpus.

Other funds in the segment, too, have a similar investment mandate. Franklin Flexi-Cap Fund, however, invests across market capitalisation range. The fund can invest up to 75-100 per in large caps, 20-100 per cent in mid-caps and up to 70 per cent in small stocks.

To be fair to multi-cap funds, the diversified funds that have done well by investing in sectors that have grown fast, like infrastructure and engineering, and some are even like thematic funds. Besides, experts reckon that not all the funds have a similar stock selection strategy. Says Pandit: “It all boils down to stock selection. Funds that have picked stocks well have had a good year.”

Another reason why diversified funds have done well is because large caps usually move up first in any booming market. Says R. Swaminathan, Vice President, IDBI Capital Market: “Diversified funds can give immediate returns but multi-cap funds perform over a period.” Small- and mid-cap stocks take a while to perform, feels Swaminathan.

It’s usually the large-cap stocks that move first, followed by midand small-cap stocks. “Investments in mid- and small-cap stocks will catch up subsequently and it will reflect in the performance of multicap funds over a longer period.”

Will they do so? Only time will tell. But R. Rajagopal, Chief Investment Officer, DBS Chola Mutual Fund, thinks there’s scope for the funds to do well. “The market has shown that mid-caps have done better than large caps, so if you look at it over the mediumterm, they can also be expected to do well.” If the market maintains its all-round performance next year as it did this year, perhaps the multi-cap funds will get their chance to beat their diversified peers. Watch this space.