Navi launches India's first passive multi-cap fund. Should you invest?

There are 25 multi-cap funds in the market, but what makes Navi's multi-cap offering unique is that it is an index fund.

Simply put, unlike others, Navi's multi-cap fund— Navi Nifty 500 Multicap 50:25:25 Index Fund —will aim to replicate the multi-cap index and not depend on a fund manager's stock-picking skills.

Navi Nifty 500 Multicap 50:25:25 Index Fund's new fund offer (NFO), which started on July 18, 2024, will remain open for subscription until July 31, 2024.

Suggested reads: What are NFOs & What are index funds

About the index

Since Navi's multi-cap fund will aim to mirror the Nifty 500 Multicap 50:25:25 Index rather than a fund manager's expertise, let's learn more about the index.

• The Nifty 500 Multicap 50:25:25 Index, the benchmark for multi-cap funds, was launched in December 2020.
  
• While the Nifty 500 weighs companies based on free-float market cap, the multi-cap index fixes weights at 50 per cent for large caps and 25 per cent each for mid- and small caps. For example, suppose large-cap stock A has a free-float market cap of 30 per cent, it will be represented as 15 per cent in this index due to the 50 per cent restriction on the large-cap segment.
  
• Lastly, the index is reshaped every six months in January and July based on each company's current free-float market capitalisation.

Passive vs Active funds

• Landscape: The multi-cap category has proliferated since 2021, growing from eight funds to 25 currently. Navi's multi-cap fund, meanwhile, is the first scheme to track the multi-cap index.
  
• Performance: Multi-cap funds have a limited history, so their performance can't be a foolproof indicator. Putting that into context, we found the active funds to outperform the Navi Nifty 500 Multicap 50:25:25 Index by an average of 2 per cent across YTD (so far in 2024), 1-year, and 3-year periods as of July 18, 2024. The active funds have an edge primarily due to higher allocations in mid- and small-cap segments. On average, active funds allocate 42, 28 and 30 per cent to large, mid and small caps, respectively, while the index maintains a 50-25-25 allocation.
  When we take a more granular look at the returns, actively managed funds have outperformed the index in 28 out of 42 months since January 2021.
  
• Sector weights : Although Financials and Capital Goods hold the top two sector positions for both active funds and the index, the third spot diverges, with Services (with 8.2 per cent) taking precedence in active funds and Technology (7.8 per cent) taking the third spot in the index.

About Navi Mutual Fund
A relatively new entrant, Navi has vowed to be a gamechanger in the mutual fund space, given they exclusively seek to launch index funds. What's more, the same set of fund managers oversee all the index funds.

What you should do

Although index funds are cost-effective, they have their challenges.

For starters, the fund comes with a rigid allocation. As discussed earlier, this is one of the reasons why it has underperformed active funds over one and three years.

Second, it's crucial to note that active management has usually demonstrated potential for higher long-term returns in mid- and small-cap segments.

Therefore, we suggest you adopt a wait-and-watch policy before diverting your money into Navi's multi-cap fund.

Also read: Kotak BSE PSU Index Fund NFO until July 24, 2024. Should you invest?