Multi-cap Equity Funds:Saviours Of Falling Market?

Numerous academic studies have shown that different categories of stocks perform in different periods. Depending upon the economic cycle and stage of stock market cycle, stocks from different sectors and market caps perform. A common investor neither has the knack to understand these cycles nor does he have the time to analyse these cycles and shift his investment accordingly.

Therefore, ideally a multi-cap equity fund that can invest in any of the market cap stocks should give you better returns than any other category of equity funds. This is because the fund manager can shift his investments across sectors and categories. Multi-cap funds are 'go anywhere' funds that invest in companies across market capitalisation and sectors. Even the new categorisation rule by SEBI for multi-cap funds stipulates minimum investment of 65% in equity and equity-related instruments of the total assets and no other restriction.

To understand if these funds have really performed during different phases of stock market, we analysed the data of 69 multi-cap funds that are in existence since January 2012. We studied the monthly performance of these funds. We then took the median returns of these funds instead of average returns, as median returns would help us to weed out any outliers that would skew the average returns towards them. For example, if we take the average returns to evaluate the performance of the multi-cap funds, the returns are higher in case of average returns as Rs 100 invested at the start of year 2012 would have given Rs 266.3 by taking average returns as compared to Rs 263.68 given by median returns.

If we take the aggregate value, every Rs 100 invested in the multi-cap funds would have become Rs 263.68 by the end of August 22, 2018. The same amount invested in S&P 500 would have become Rs 238.8. The reason for comparing it with S&P BSE 500 is that most of the funds benchmark their performance against BSE 500 because it constitutes stocks of different market caps and different sectors. So, at the aggregate level, the multi-cap funds have performed better than their benchmarks in the long term horizon.

Performance of Multi-cap Funds 

When benchmark gave negative return The real test of multi-cap fund is its performance when the markets in general are falling. A better performance during this time will show if the fund manager has foreseen the trend and shifted his investments accordingly. To ascertain this, we compared the monthly returns of these funds against monthly performance of the BSE 500. We found that the median performance of the multi-cap funds has been better than BSE 500 when the BSE 500 gave negative returns on a monthly basis.

Of all the 81 monthly returns that we studied, there were 48 months when BSE 500 gave positive returns and in 31 months it gave negative returns. 

So ideally, in these 31 months when the BSE 500 gave negative returns, the multi-cap funds should be performing better because of the flexibility being offered to these funds to churn their portfolio according to the market. The study shows that these funds have performed better than the benchmark during the falling market. In these 31 months, the median performance of the multi-cap funds has been better than the BSE 500 and in 24 months these funds have outperformed the benchmark. This should not be construed that the multi-cap funds generated positive returns during this period. It is only that these funds fell less than the benchmark. 

When benchmark gave positive return 

In our study period, BSE 500 has given positive return in 48 months. Surprisingly, when the market gave positive returns, the multi-cap funds have underperformed the benchmark. Out of these 48 months, these funds have given lower returns than the benchmark in 25 months and in the remaining 23 months, these funds have outperformed the BSE 500. 

The Current Scenario 

Although currently the market is trading at all-time high, it has been volatile since the start of February this year. The performance of multi-cap funds during these six months are not very much different from what we have seen historically. In the month of February and March when the market fell, multi-cap fund outperformed BSE 500, but it has underperformed in the last three months when the market has gathered strength. In terms of categories, multi-cap funds have performed better than the small-cap and mid-cap dedicated funds in the last three months but these have underperformed the large-cap dedicated funds. 

Digging deep and analysing the performance of these MF schemes, it seemed obvious that the schemes that allocated more funds towards large-cap stocks have witnessed better performance. For example, ICICI Prudential Multi-cap Fund has increased its exposure to large-caps by 20.41 percentage points in the last three months ending July 2018 and hence it has remained the best performer in its category in the last three months. 

Therefore, if you want to invest in a multi-cap fund, you need to or park your funds into a scheme whose fund manager understand the market properly and allocates his funds accordingly and performs. Overall, the multi-cap fund is suitable for a novice investor who is investing in a single fund and has not diversified his investments across different categories. It is also suitable for those investors who do not have the stomach to digest volatility.