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Planning To Invest In The Best Multicap Funds In 2018? Think Again - Outside View by PersonalFN

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Planning To Invest In The Best Multicap Funds In 2018? Think Again
Dec 20, 2017

When buying a car, some prefer Sports Utility Vehicles (SUVs) that are usually more expensive, but the thrill of driving them is an owner's delight. Others favour hatchbacks that are convenient to take the family around town.

Car manufacturers then introduced a new segment known as 'Crossovers'. A crossover offers the features of a SUV with the dimensions and efficiency of a family vehicle. Such cars have been a big hit among those wanting the best of both worlds.

Similarly, in the mutual fund space too, there are large-cap funds that offer stability at one end. And at the other end, midcap and smallcap funds offer the excitement of supernormal returns, though being equally risky at the same time.

In between both the categories are multicap funds. Multicaps invest in a mix of both largecap and midcap stocks. Hence, multicap funds offer investors stability as well as a high-return potential.

Multi-caps funds are expected to maintain a stable allocation to largecap and midcap stocks. This category of funds is often confused with flexicap funds that vary their exposure to largecap and midcap stocks depending on the market conditions. A flexicap fund can work as a large cap fund, if the fund manager expects a better performance from largecaps. It may also serve as a mid & small cap fund if he (the fund manager) turns bullish on mid-sized companies.

In some cases, the fund house has not clearly defined the investment objectives of such equity-diversified funds. Hence, you might find a multicap fund behaving like a flexicap fund and vice-versa.

The mutual fund regulator puts an end to the confusion by defining multicap funds. Multicap funds are defined as "An open ended equity scheme investing across largecap, midcap, smallcap stocks." Hence, the fund manager is free to vary the asset allocation across market-caps. The regulator introduced another category known as 'Large & Midcap Fund'. Here, the minimum investment to largecap and midcap stocks is 35% each.

Largecap stocks are the first 100 companies in terms of full market capitalisation. While midcap stocks are the next 150 companies in terms of marketcap.

Given these definitions, soon fund houses will be categorising their existing multicap and flexicap funds in to one of these categories. In certain cases, the fund may also have to alter the investment objective of the fund in order to meet the definition set by the regulator. As only one scheme per category is allowed, this may also result in several scheme mergers.

Thus, investors should keep this in mind when searching for the best multicap funds for 2018.

Let's take a look at the top multicap funds in 2017.

Top 10 Multicap Funds of 2017
Scheme Name 1 Year (%)
Aditya Birla SL Pure Value 50.78
Principal Growth 47.64
MOSt Focused Multicap 35 43.78
Reliance Reg Savings-Equity 42.68
Aditya Birla SL Advantage 40.90
HDFC Capital Builder 39.99
BOI AXA Equity 38.87
DSPBR Equity 37.92
Escorts Growth 36.79
Templeton India Growth 36.26
Data as on December 19, 2017. Returns are absolute
(Source: ACE MF, PersonalFN Research)

*Please note, this table only represents the best performing 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 indicative purposes.

Is now a good time to invest in multicap funds?

Valuations are stretched across market capitalisation. The trail P/E of the Sensex is above 24x while the P/E of the mid-cap index is in excess of 45x. The mid-cap valuations shot up from around 30x to 40x on deteriorating earnings. The small-cap index has soared to unimaginable valuations. From a P/E of about 80x a few months back, P/E is just short of the 90x mark.

Market Valuations Continue to Soar
Market Valuations Continue to Soar

Investors are investing heavily expecting an upswing in earnings. However, they may get disappointed. The overall economic growth may not sustain without pick up in investment activity (which is hinged on internal and external factors). Also, the slowdown in consumption (due to cash crunch, loss of jobs -especially in the unorganised sector, diminutive rise in salaries, slower employment growth and rural distress) when read with the investment growth number, highlights the negative output gap that exists in the Indian economy.

The Organisation for Economic Co-operation and Development (OECD) has trimmed India's growth forecast to 6.7% (from June 2017 estimate of 7.3%) citing temporary impact of rollout of GST and demonetisation. Likewise, Fitch (an international rating agency) has pruned India's growth estimates for this fiscal further to 6.7% from 6.9% and 7.4% earlier citing that rebound was weaker than expected. Similarly, the International Monetary Fund (IMF) has pared its growth projections for India to 6.7% from 7.2% for the currently fiscal year.

While the government will look to push the reform agenda strongly, a lot of work is needed to stimulate a pick-up in investment activity. Credit growth has been tepid. According to the RBI data, on a year-on-year (y-o-y) basis the non-food bank credit increased by 6.6% in October 2017; which was marginally lower than 6.7% in October 2016; but, noticeably lower than 10.8% in September 2016.

Given this backdrop, it will be tough for equities to repeat the past year's performance. However, for the long term, equities still remain the best route to create wealth. Hence, when investing in equity funds, adopt the systematic approach to investing.

How to pick the best multicap funds for 2018?

In order to identify the best mutual funds, one would rely heavily on past performance. Though past performance is an unreliable indicator of future returns, a scheme that has done well consistently in the past, is expected to do well in the future too. However, this may not hold true going ahead.

With the regulator issuing guidelines for the categorisation and rationalisation of mutual funds, how mutual funds adhere to this needs to be closely watched. The category choice is limited and only one scheme is allowed per category.

You need to keep an eye on how fund houses categorise their schemes. A significant change in the investment objective may render the past performance of the fund irrelevant. If the investment objective of the scheme remains the same, a change in categorisation will not matter.

You need to pick the scheme based on its risk-return parameters vis-a-vis other peers and the quality of fund management. Not all mutual funds have the capability to perform consistently. You need to analyse the returns of multicap funds across multiple periods and market cycles. Shortlist the funds that have consistently outraced the market and their peers. The scheme you select should match your risk profile and should be suitable to meet your investment goals.

Those who are unsure about which mutual fund schemes to invest in may try PersonalFN's unbiased mutual fund research services. Along with quantitative parameters such as performance, PersonalFN also considers qualitative parameters such as portfolio characteristics while analysing mutual fund schemes.

One such service of PersonalFN is FundSelect. This service helps you identify the top-performing funds across varying market caps and investment styles--be it largecap, midcap, multicap, value-based or balanced funds--highlighting the underperforming or average performing ones too.

FundSelect will assist you in discovering the "best of the best" equity as well as debt funds in the market. It will help you build a solid mutual fund portfolio through disciplined investing. So, you have an opportunity to benefit from market beating returns generated by quality mutual funds.

So don't hesitate...give FundSelect a try Now.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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