When the SEBI circular on new mandate for multicap funds was issued on 11 September, 2020, there was a lot of debate in the market on the lack of flexibility on the move. The circular mandated that multi cap funds should have a minimum of 25% assets in large, mid and small cap segments. This took away the flexibility of fund managers to allocate to their preferred segments, like large cap. The preference for large cap stocks was from fund managers and investors alike. The regulation that minimum 25% should be allocated to small cap stocks was seen as a burden imposed by SEBI. A few months later, SEBI allowed a new category called flexi cap Funds. Since this category allowed flexibility, many AMCs moved their multi cap funds to the flexi cap category.
Now that it has been some time, let us look back and take stock. The initial Circular of 11 September 2020 allowed time till 31 January 2021, to multi cap schemes to align to the new norms. In other words, till 31 December 2020 or early part of January 2021, there was no compulsion to invest a minimum of 25% of the portfolio in small cap stocks. Having said that, some AMCs had initiated the portfolio shuffling to smoothen out the impact. Subsequent to the second circular, of 6 November 2020, the conversion process started by most AMCs, from multi cap to flexi cap, subject to one-month notice window for change of fundamental attribute. We will now look at the movement in the industry and the performance.
AUM
The AUM of multi cap funds as on October, 2020 was Rs 1.46 lakh crore and obviously there was no existence of flexi cap category. As of May 2021, the AUM of multi cap funds was only Rs 23 thousand crore as most of the schemes were moved to the new category. In flexi cap funds, AUM was Rs 1.68 lakh crore in May 2021. The quantum of Rs 1.68 lakh crore is net of inflows / outflows over the period and market movement i.e. when the equity market moves up, AUM moves up along with. That is, apart from conversion of scheme category, there are other reasons for AUM moving up. As of October 2020, there were 35 schemes in the multi cap category, which dwindled to 10 in May 2021, post conversions. In the flexi cap category, there are 24 schemes as of May 2021. Net-net, most of the large AMCs have moved their erstwhile multi cap fund to the new category. However, as per regulation, an AMC can have funds in both categories.
Performance
Speaking of performance, small cap stocks have outperformed large cap ones. This is uncanny, because usually when the economy is recovering after a slowdown. Generally, large cap stocks are the first ones to move up as larger companies have more resilience and recover faster.
The severity of the lockdown / restrictions has forced many MSMEs to shut shop, and the relatively larger ones, listed small cap companies, have gained at the expense. We will look at returns from 31 January 2021, as that was the final date for multi cap funds to align their portfolio with minimum 25% small cap stocks. In the period 31 January 2021 till 15 June 2021, small Cap funds as a category has delivered 35.42% returns whereas Large Cap category has delivered 16.58%. This phenomenon of small cap stocks doing better than large cap ones is visible in multi-flexi Cap comparative performance. Since 31 January 2021 till 15 June 2021, multi cap funds with 26.16% returns (with minimum 25% smallcap stocks) have outperformed the flexi Cap set (large cap oriented) which has delivered 19.19%. Returns are of regular (non-direct) option.
Historically, small cap stocks have done better. Till 15 June 2021, 10-year returns from small cap funds (regular option) is 17.47% annualized and that from Large Cap funds is 12.39%. However, volatility has been higher in small cap funds. Moreover, stock picking skills of the fund manager in the vast universe of smaller companies is vital. Hence in a way the issue of discontent in the market and creation of a new category with flexibility still remains valid. In this phase, from demarcation of funds till mid-June 2021, multi cap has done better than flexi. Going forward, volatility may tell a different story.
Conclusion
If you want to go with the fund managers’ choice, go for flexi cap. If you have a view on small cap stocks, you may do the allocation to small cap funds accordingly in your portfolio. If you want a defined allocation, 25% or little higher through a particular fund, you may pick a multi cap fund.
Disclaimer: All the views in the Blog is personal of the author not attributing to anyone.
