NFO review: HDFC Multicap Fund; should you invest now?

The fund closes for subscription on Dec. 7; it is an open ended equity scheme investing across large cap, mid cap & small cap stocks

Staff Writer   /   December 3, 2021

The multicap mutual fund category is a relatively new category due to the revised mandate. The word multicap is not new in the Indian MF circles, but the erstwhile loose definition of multicap funds has now been given to flexicap funds. Hence, big and small AMCs have launched new offerings for the new multicap space. There are already 12 products here in this bucket and HDFC AMC has become the 13th one to launch a fresh scheme. The HDFC Multicap Fund opened for subscription on November 23 and the NFO will close on December 7. Let us take a look at the NFO and see how well it compares with others.

Multicap mandate

Earlier, multicap equity mutual funds were those that invested across large, mid and smallcap stocks. That mandate has been revised now. Today, multicap funds are those that invest atleast 25% per cent in largecaps, atleast 25% in midcaps and atleast 25% in smallcaps. As you can see 25% fund allocation can be used freely i.e. flexible portfolio part.

For the largecaps allocation, HDFC Multicap Fund will choose to invest among the top 100 companies by market cap and well established businesses. The midcap exposure for the fund will comrpise of selections from 101st to 250th company by market cap; the future largecaps. The smallcap exposure of HDFC Multicap Fund will be concentrated around 251st company onwards in terms of mcap and niche businesses with high potential for growth.

Typically, we have seen multicap funds allocate about 40-42% in largecaps, 25-26% in midcaps and 25% in smallcaps. The rest is usually kept as cash. So, it will be interesting to see what approach HDFC Multicap NFO takes. Our understanding is that HDFC Multicap Fund may choose to allocate 25%-40% of total assets in smallcaps, while keeping 60-75% in large & midcaps.

Why multicap

Many readers may ask the fundamental question. Why multicap approach? Why not largecap? To answer that question, one must understand different segments outperform each other at diff erent times. Hence, it is prudent to diversify across market cap segments. Multicap funds give a good vehicle to diversify. And since market moves in phases, it is important to be in the right segment at the right time, instead of choosing one over the other.

Multicap funds also offer a better risk profile. They are positioned between largecap funds and midcap funds. This is because largecap funds invest minimum 80% in largecaps. Midcap funds invest minimum 65% in midcaps. Due to these mandates, a multicap fund offers a better risk-reward matrix.

Historically, a sharp rally in small- and mid-cap stocks has put multi-cap funds on the spotlight. But minimum 25% exposure each to mid and smallcaps means the investment philosophy has to be good. Hence, identifying scalable businesses which generate cash flows work wells in mid and smallcap space. This is very important for investors with a longer-term outlook.

Multicap funds offer controlled exposure and that helps reduce volatility of portfolio. This is an important thing to note amid current volatile markets.

HDFC Multicap NFO details

Fund manager – Gopal Agrawal has over 16 years experience in fund management and 2 years in equity research. Before joining HDFC Asset Management Company Limited, he has worked with DSP Investment Managers Private Limited TATA Asset Management Company Limited and Mirae Asset Global Investments (India) Pvt. Ltd.

Exit load – If redeemed/switched out within 1 year from the date of allotment, exit load is 1%. If redeemed after 1 year from the date of allotment, no load.

Investors must keep in mind that for equity funds the AMC’s track record is important. In this case, HDFC AMC has a stellar record of managing equity funds for more than 2 decades. This provides an added comfort. Instead of lumpsum allocation, investors should consider SIP investments to achieve market cap based diversified allocation.

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