A change in rules has opened up the multi-cap category for mutual funds. Now, SBI Mutual Fund, India’s largest asset manager, is launching its own multi-cap fund. The new fund offer (NFO) opens on February 14.
What’s the scheme about?
The Securities and Exchange Board of India’s (SEBI) rules state that a multi-cap fund needs to invest a minimum of 25 percent each in small-cap, mid-cap and large-cap stocks. However, the SBI Multicap Fund will invest 27 percent in each of these categories, with the remainder left to the fund manager’s discretion.
Ruchit Mehta, head of research at SBI MF, said the additional allocation (27 percent instead of 25 percent) is being made as a buffer against market volatility. While the fund will be managed by R Srinivasan, who is head of equity at SBI MF, the portfolio will be built based on ideas generated by its team of 15 sector analysts.
The fund will be benchmarked against Nifty 500 Multicap 50:25:25, but it will not try to align its sector weights just to be closer to the index weights.
As Mehta pointed out, any scheme out there today that’s benchmarked against large-cap indices is forced to make a heavy allocation to the financial services sector, which has as much as a 33 percent weightage in large-cap indices.
“So a benchmark-conscious fund manager will have to manage sector weights so as to reduce the risk of underperforming the index,” he said.
SBI Multicap Fund will not depend upon index weights to construct its portfolio.
The portfolio will capture stock investment ideas through the analyst team’s research framework. The stock research process that the analyst team follows will filter high-conviction investment ideas from SBI MF’s 750 stock coverage, which is split into passive and active universes.
The ideas generated by the analysts will be ranked in order of their preference. Each analyst will assign a confidence score, ranging from 1 to 5, to each stock idea, reflecting their view on aspects such as the company’s fundamentals, growth potential, management quality, and valuations.
There will be an overlay of sector outlook, with preference given to stocks on which the fund house has a positive view.
This list of high-conviction ideas will include international stocks. The fund has built in a provision to invest up to 10 percent of the scheme’s funds in international stocks.
The fund manager will pick from analysts’ high-conviction ideas and account for factors such as liquidity of the stock, existing stock ownership and whether a meaningful allocation can be made to the stock. He will take a call on how much funds should be allocated to a particular stock.
The fund will aim to keep the number of stocks in its portfolio in the range of 30-35 at any given point of time. So, it will be run like a focused fund.
“While taking high-conviction investment calls can give outsized returns, it can also lead to concentration risks, if not managed carefully,” said Rupesh Nagda, founder of Family First Capital.
“There are several research papers out there that suggest that beyond 20 stocks, the benefits of diversification peters down significantly,” said Srinivasan.
A multi-cap fund may go through periods of higher volatility than flexi-cap schemes due to the former’s higher allocations to mid- and small-caps.
Also, multi-cap funds may do well when the broader markets rally, but could underperform if the markets turn narrow and large-cap stocks lead the gains. During such periods, flexi-cap funds could outperform as they can increase their large-cap exposure.
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, said flexi-cap funds may be more suitable for investors right now, given the lack of clarity on whether current market valuations are justified or excessive.
“Getting into a flexi-cap fund with a track record would be better as the fund manager has the flexibility to move allocations across market segments, with no minimum limits,” he said.
Srinivasan has considerable experience managing funds with high-conviction investment calls. A multi-cap fund gives an investor exposure to all market segments within a portfolio. But the multi-cap category is still a newly defined category by SEBI and one that needs to build a track record. Once the fund and the category has built a track record, investors can consider the SBI Multicap Fund for their investment portfolio. The NFO closes on February 28.