Synopsis
To compare the performance of multi cap and flexi cap funds, we have taken the initial date as 1 January 2021, which is when the guideline issued on 11 September 2020 became effective. We have data till 19 October 2022.
When the Sebi issued a circular on multi cap funds on 11 September 2020, there was a hue and cry among both the fund management community and the investment / distribution community. The circular mandated that multi cap funds have to allocate at least 25% to each of large cap, mid cap and small cap stocks. The logic of SEBI was that if a fund is called multi cap, it should have a multi cap portfolio. As a practice, the portfolio of these funds was oriented towards large cap stocks, say, 70% or 80%. The fund management and investment / distribution community felt it took away the flexibility the fund manager had till then. The solution: another Circular was issued on 6 November 2020, a new category called flexi cap was introduced. Some AMCs migrated their multi cap funds to flexi cap category to retain the flexibility. Some AMCs retained their multi cap fund and floated another flexi cap fund. And some AMCs floated multi cap funds.
Cut to present: performance
That is history. Now, we come to the present. To compare the performance of multi cap and flexi cap funds, we have taken the initial date as 1 January 2021, which is when the guideline issued on 11 September 2020 became effective. We have data till 19 October 2022. These 26 funds were launched earlier, migrated to flexi category prior to 1 January 2021. We have performance data for 26 flexi cap funds. Eight more flexi cap funds were floated subsequently, but we have not considered them for the study.
The eight multi cap funds have delivered an annualised return of 22.9%. Compred to this, the 26 flexi cap funds have delivered 16% annualized returns. And that is a big difference: almost 7 percentage points.
Does the higher return of the multi cap funds come at the cost of higher volatility? Not much. We have taken the annualized volatility of these eight multi cap and 26 flexi cap funds for the same period. The annualized standard deviation of the eight multi cap funds is 17.3%, the number for the 26 flexi cap funds is 16.5%. Flexi cap funds have a lower volatility, but only so much.
What led to it?
The premise of the reaction to 11 September 2020 was that small cap stocks are more volatile. Usually, in a bull cycle, they gain more than large cap stocks and in a bear cycle they lose more than large caps. In this cycle, from 1 January 2021 till 19 October 2022, Nifty 50 has delivered returns of 13.2% annualized, Nifty Mid-cap 150 Index has delivered 24.2% annualized, and Nifty Small-cap 250 Index delivered 26%. Clearly, mid and small cap stocks have outperformed large cap ones. This has led to multi cap funds out-performing flexi cap ones. Even now, the flexi cap funds have a large cap orientation, for the major allocation in the portfolio. Multi cap funds, as per regulation, have minimum 25% in each of mid cap and small cap stocks.
To conclude, the AUM in multi cap funds is approximately Rs 63 thousand crore as on September 2022, and that in flexi cap funds is Rs 2.4 lakh crore. It is obvious where investors’ preference lies. In the equity fund categories, flexi cap has the highest AUM, ahead of all other categories including large cap. The rationale is to have a portfolio of large cap bias with flexibility to the fund manager to allocate to mid and small caps as well. There is expectation of relatively lower volatility in large cap stocks.
What pans out in future will be interesting to watch out. As of now, multi cap funds are doing better.
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