The rebound in PMI index for manufacturing and services in the month of January came as pleasant news when there was an eager wait for green shoots of economic recovery amid the on-going slowdown. In addition, RBI mentioned that some high-frequency indicators have turned around and pointed to a lift in the momentum of economic activity.
If these positive indicators sustain, small and mid caps could once again join their large cap peers on its upward trajectory. This expected improvement in market breadth makes it an opportune time to multiply wealth by investing in worthy Multicap Funds.
Graph: Mid and small cap stocks show signs of growth while large caps continue to rise
Base taken as 10,000
Data as on February 13, 2020
(Source: bseindia.com, PersonalFN Research)
What are multicap funds?
Multicap funds are equity oriented mutual funds that invest minimum 65% of its assets across large, mid and small caps. These funds have the flexibility to shift the allocation in line with the changing market conditions. Investors thus benefit from the stability of the large caps and high growth potential of mid and small caps.
Large caps fare well even when there is an economic slowdown, while mid and small caps tend to do well when the economy is growing which makes multicap funds a good proposition to ride the market highs and lows.
Graph: Placement of multicap funds on risk-return spectrum
For illustrative purpose only
(Source: PersonalFN Research)
Multicap funds invest across market capitalisation which makes them riskier than pure large cap funds and large & midcap funds, but less risky than pure mid cap funds and small cap funds. If you are an aggressive investor looking to gain from across market capitalisation over a long term, you may consider investing in multicap funds.
Table: Performance of multicap funds over the last five years
Returns are point-to-point
Data as on February 13, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing Multicap Funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for an indicative purpose. Speak to your investment advisor for further assistance before investing.
Many multicap funds clearly outpaced the benchmark S&P BSE 500 - TRI across 1-year, 3-year, and 5-year time period. As most multicap funds have a large-cap bias, the recent rally in frontline stocks along with slight improvement in market breadth benefitted these funds immensely in the last 1-year.
Some of the best multicap funds as per the unbiased research and analysis at PersonalFN that fare well on both quantitative and qualitative parameters are Canara Rob Equity Diver Fund, Parag Parikh Long Term Equity Fund, Invesco India Multicap Fund, and Kotak Standard Multicap Fund.
Some other decent performers are:
But keep in mind that the past performance is not indicative of future returns. Hence, if you invest in top performing schemes of 2019 anticipating that they will be top performers in 2020, you may be disappointed.
If you wish to invest in best mutual funds than can potentially multiply your portfolio returns but do not know how to pick them, do not miss our latest research finding where we have identified five high alpha generating funds
Remember do not pick multicap funds by:
The important factor while selecting any scheme is to evaluate its performance based on quantitative and qualitative parameters.
Here are the parameters to look into while selecting best multicap funds:
Quantitative Parameters:
-
Performance and risk analysis
Analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns.
Under this, you need to rank the fund based on quantitative parameters like rolling returns across short-term and long-term periods, such as a 1-year, 3-year, and 5-year timeframe, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.
-
Performance across market cycles
You need to ensure that the fund has the ability to perform consistently well across multiple market cycles. Therefore, compare the performance of all the available multicap funds vis-a-vis their benchmark index as well as category peers across bull phases and bear market phases.
A fund that performs well on both sides of the market should rank higher on the list.
Qualitative Parameters
-
Portfolio Quality
Adequate Diversification - The scheme should not hold a highly concentrated portfolio. It should have a well-diversified portfolio and the exposure to the top-10 holdings should be ideally under 50%.
Low Churn - Engaging in high churning can result in higher cost impacting the overall return of the scheme. Therefore, you also need to consider the portfolio turnover ratio and expenses, and penalise funds involved in high churning, i.e. those funds with a turnover ratio of more than 100%.<
-
Quality of Fund Management
You must consider the fund manager's experience, workload, and the consistency of the fund house. Therefore, assess the following criteria:
The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade.
The number of schemes managed - A fund manager usually manages multiple schemes. Thus, you need to check if the fund manager is burdened with managing a large number of schemes. If they are managing more than five open-ended funds, it should raise a red flag.
The efficiency of the fund house in managing your money - Research about the fund house's performance across schemes; find out if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place.
Yes, we know that the above list is a lot for an average investor to look at. It involves number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance.
Watch this short video on selecting mutual fund schemes:
At PersonalFN, we select and recommend mutual funds on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:
-
S - Systems and Processes
-
M - Market Cycle Performance
-
A - Asset Management Style
-
R - Risk-Reward Ratios
-
T - Performance Track Record
Outlook for multicap funds in 2020
Large caps may continue to rise in the coming quarter as the economy recovers. However, if these stocks witness limited growth due to the high valuations they have reached in the recent months, mid and small caps could potentially generate higher returns. However, the extent and time horizon of expected recovery cannot be ascertained.
If you invest in the best multicap fund that focuses on picking quality stocks across large, mid and small caps and efficiently manages risk, it can prove to be a wealth multiplier.
However, one needs to keep return expectation realistic because of the volatility the market has been facing. Invest in schemes that align with your set investment objective and personalised asset allocation plan to avoid undue risk. Further to lower the volatility and benefit from the power of compounding of wealth opt for the systematic investment plan of mutual funds.
Editor's Note: Looking to invest in high-return generating mutual funds? Get access to five high alpha generating mutual funds that have the potential to boost your portfolio returns in the next few years.
To find the best funds with high alpha generating potential, we have developed a 'SMART Alpha Score' model. It has an additional categoriser on top of our popular 'SMART Score' process.
With optimum weightage to each parameter, which we consider important in identifying fundamentally strong funds with the potential to generate alpha, this model helps us zero in on quality names that have the ability to trump the benchmark and generate alpha returns for its long term investors.
Author: Divya Grover