A Disciplined Tour Around all Market Caps

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A Disciplined Tour Around all Market Caps

                                         Consistent performance is a very important measure for the selection of a good mutual fund scheme. Any equity mutual fund scheme comes with past performance, it may be volatile or consistent. Both have their own significance. If a scheme is volatile and able to give better returns in long term, no doubt is good for everyone. For some volatility is not digestible and they want consistent performance in their portfolio.

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Let us see how Large-cap, Mid-cap, and Small-cap funds and Multicap funds themselves have shown volatility and consistency.
  • Large-Cap Funds - Large Cap funds are the funds that invest a major proportion of their assets under management (AUM) in equity shares of companies with a large market capitalization (Top 100 companies as per market capitalization), like Britannia, HDFC, ITC, HUL, and more. These companies that fall under this bracket are known to have a high reputation and less volatility.
  • Mid-Cap Funds - Mid-cap funds are the funds that focus on companies with a market capitalization in the middle range of listed stocks (Top 101st to 250th companies as per market capitalization). Mid-cap stocks tend to offer investors greater growth potential than large-cap stocks, but with less volatility and risk than small-cap stocks.
  • Small-Cap Funds – As per SEBI regulation Small-cap mutual funds are invested in companies that are beyond the top 250 stocks (Including 100 large-cap and 150 mid-cap stocks) in the stock exchange as per their market capitalization. Small-cap mutual funds have become a popular investment choice due to their higher volatility and capacity to provide higher returns in the long term.
  • Multi-Cap Funds - These funds invest across the market capitalization spectrum in stocks. Thus, their portfolio consists of large, mid, and small capitalization stocks. They are less risky than pure mid cap and small-cap funds, making them suitable for less aggressive investors.

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Funds with Performance Since their Inception

Source – Advisor Khoj, as on 26th December 2022. Trailing returns of Multi cap, Large cap, Midcap and Small cap, focused, and Flexicap Funds with their Market Capitalization. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future.

Some very interesting pointers are coming out of a comparative study of various funds. We have taken 3 top performing schemes under consideration on the basis of a 10-year returns as on 26th Dec 2022.

  1. Average return of the top 3 large-cap funds is 14.74% CAGR, whereas the average return of the top 3 Mid-cap funds is 18.61% CAGR and of the top 3 small-cap funds is 22.62%CAGR.
  2. If anyone invested an equal amount in each of the 3 categories at the same time for the same stipulated time horizon, his average return comes to be 18.65% CAGR.
  3. For the same time horizon, instead of investing in all 3 categories differently and by investing in any of the following categories, the average return of the top 3 Flexi-cap funds is 16.22% CAGR, and of Multi-cap funds is 16.8% CAGR and for the top 3 Focused equity fund is 16.87% CAGR.
  4. As per the chart above, the large-cap funds hold their major investment in large-cap stocks (82.72%), mid-cap funds in mid-cap stocks (67.91%) and small-cap funds in small-cap stocks (72.07%).

Another important outcome we can draw from this study is that any scheme’s performance is mainly governed by its core holding pattern.

We have seen as in above point no 4, major stock holding patterns of large, mid, and small-cap funds. They are true to their mandate provided by SEBI guidelines. Now consider the average holding patterns of stocks in multi-cap funds. They are again kept as per the mandate of SEBI. This means a minimum of 25% of each large, mid, and small cap and the rests 25% as per the choice of the fund manager. Usually, the fund manager increases the rest by 25% in large-cap socks so as to give consistency.

But in the case of Flexi cap and focused equity fund category, the fund manager keeps the holding patterns of stocks as per their choice and research. Therefore, you can watch that returns of funds follow the equity holding patterns. Though this is not a general rule to generate returns. Again, the fund managers of these funds hold a major proportion of stocks in the large-cap segment.

Comparative Performance of Large-cap Funds with other Instruments

Chart 1

Graphical Representation 1

Advisor Khoj, as on 27th December 2022. Trailing returns of Large cap Funds with their Market Capitalization. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future. The above graph is provided solely for the purpose of educating investors and should not be taken as specific investment advice. Risk profiles vary across different market cap segments. You should invest based on your risk appetite and consult a financial advisor if necessary.

₹1,00,000 was invested in large-cap funds and fixed deposits, Gold, and PPF.

Chart 1 Shows- The average return of the large-cap fund since inception is 14.99% CAGR and the average return of the fixed deposit, Gold and PPF is 6.62% CAGR for the same period. The large-cap fund has given 2x better returns than other investment instruments.

  • Because of their size and organizational complexity, these companies follow strong corporate governance practices. Investors who put their money in such companies see a slow and gradual rise in their wealth over the long term.
  • To make the best out of these funds, it is recommended that you should invest in them for at least five to seven years.

Comparative Performance of Mid-cap Funds with other Instruments

Chart 2

Graphical Representation 2

Source – Advisor Khoj, as on 27th December 2022. Trailing returns of Large cap Funds with their Market Capitalization. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future. The above graph is provided solely for the purpose of educating investors and should not be taken as specific investment advice. Risk profiles vary across different market cap segments. You should invest based on your risk appetite and consult a financial advisor if necessary.

₹1,00,000 was invested in Mid-cap funds and fixed deposits, Gold, and PPF.

Chart 2 Shows- The average return of the large-cap fund since inception is 18.79% CAGR and the average return of the fixed deposit, Gold and PPF is 6.61% CAGR for the same period. Large-cap has given 3x better returns in comparison with other investment instrument.

  • Investors who invest in mid-cap funds may get benefited from Diversification as Investment is spread across several mid-cap stocks and sectors, making equity funds less risky than direct investment.
  • investors can start investing in mid-cap funds with as low as INR 500. Also, investors can easily realize their financial goals in the long term by starting with small investments in top-performing mid-cap funds.
  • Mid-cap mutual funds are a type of open-ended equity fund. These funds’ investments are easily liquidated.

Comparative Performance of Small-cap Funds with other Instruments

Chart 3

Graphical Representation 3

Source – Advisor Khoj, as on 27th December 2022. Trailing returns of Large cap Funds with their Market Capitalization. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future. The above graph is provided solely for the purpose of educating investors and should not be taken as specific investment advice. Risk profiles vary across different market cap segments. You should invest based on your risk appetite and consult a financial advisor if necessary.

₹1,00,000 was invested in Small-cap funds and fixed deposits, Gold, and PPF.

Chart 3 shows -The average return of the small-cap fund since inception is 22.93% CAGR and the average return of the fixed deposit, Gold and PPF is 6.61% CAGR for the same period. Investment in the small-cap fund has given around 4x better returns in comparison with other investment instrument.

  • They are long-term wealth generators. They also offer growth when large-cap stocks are underperforming.
  • Diversification across companies is very beneficial because small companies do not have a lot of information to decode and understand. So it doesn’t require much knowledge to invest in small-cap companies.

Comparative Performance of Multi cap and Large cap, Mid-cap and Small cap Funds with other Instruments

Chart 4

Graphical Representation 4

Source – Advisor Khoj, as on 27th December 2022. Trailing returns of Large cap Funds with their Market Capitalization. Disclaimer: Mutual funds are subject to market risks. Past performance may or may not be sustained in the future. The above graph is provided solely for the purpose of educating investors and should not be taken as specific investment advice. Risk profiles vary across different market cap segments. You should invest based on your risk appetite and consult a financial advisor if necessary.

Why does investment in multi-cap fund make sense?

In multi-cap funds, there is a 25:25:25 rule that is it invests 25% in large, 25% in midcap and 25% in small funds as per SEBI guidelines. And the remaining 25% will be invested according to the fund manager’s choice. When compared to investing in large, mid, and small-cap funds individually, multi-cap funds have fewer fluctuations.

    • By investing in small-cap companies that have a high potential for growth, gives you the chance to generate better returns, while at the same time balancing the risk by investing in large-cap companies.
  • Multicap funds can also be a suitable investment option for young and new-to-the-market investors who have the risk appetite and a long-term investment horizon but are indecisive about which market caps to choose from.
  • The flexibility to mix large, mid, and small-cap allows these funds to change portfolio composition to suit the market. If mid and small-cap stocks become overvalued and that space is headed for a boom, the fund manager can switch to large caps and take a defensive position.
  • Multi-cap fund managers invest in a mix of large, mid, and small-cap stocks. Fund managers shift allocation based on economic and market conditions. If they’re feeling conservative, they increase the portfolio’s large-cap stock allocation. If they think the market will improve, they buy more mid and small-cap funds.
  • An investor choosing a multi-cap fund gets exposure to the entire market via a single fund.
  • Multicap fund makes a good case for long-term investors who want to build wealth and meet their financial goals with a potentially better risk-return trade-off.

Conclusion – If anyone is aware of how market cap-based funds help them generate wealth and achieve financial goals, certainly they can choose the right funds accordingly. Maybe due to a lack of time or knowledge or awareness, anyone willing to participate in all equity mutual funds, a multi-cap fund will be the best bet for them. Multi-cap funds provide them with all season combo of all three markets’ cap-based equity investment.

Compared to single-cap funds, multi-cap funds offer risk-adjusted returns. Because they can invest in all market caps and change allocation based on the direction of the market, as defined by SEBI, fund managers can control risk by reducing allocation to riskier parts of the market and minimizing its effect by increasing allocation to companies that are expected to do well.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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