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Should one invest in NFOs of multi-cap funds?

Dhirendra Kumar shares his views on multi-cap funds

What's your view on the NFOs in the newly crafted multi-cap category? Should one invest in them?
- Ashish Godbole

One should question if they are getting anything meaningful with these funds. There is a difference between these multi-cap and flexi-cap funds. Earlier multi-caps used to be what flexi-caps are today as they were go-anywhere kind of funds. There was no restriction on them, and they could invest anywhere irrespective of the market cap. Then, SEBI came up with a guideline that changed their life. Multi-cap funds were now mandated to invest at least 25 per cent each into large-, mid-, and small-cap stocks.

Since many of these funds had turned big, they found this compulsion to invest 25 per cent into mid, and small-cap very difficult to manage. That led to hue and cry in the marketplace. With industry feedback, SEBI understood that this could negatively impact market sentiment, so they tweaked the regulation. The regulator then created another category called flexi-cap to retain the character of the erstwhile multi-cap funds. Further, it allowed fund managers to change the fund character from a multi-cap fund to a flexi-cap fund. Many funds exercised this option. Fund houses have now realised that they can attract more investors by launching a new fund. As SEBI rules allow only one fund in a category, all those fund houses who vacated their chair of the multi-cap fund are now trying to fill their product gap opportunistically. They have their own interests in launching these new funds, and investors must question if they really need one.

Secondly, why invest in a new fund when anything you can know about a fund is only after it has existed for a while? A new fund offer (NFO) only has a story. Though the story is well defined as it is clear how much will be invested in equity and how much in large-, mid-, and small-cap, nothing is known about the fund portfolio and performance. Moreover, investing in small companies successfully is not a very replicable strategy. One has to be on the run for finding great companies ahead of others and be right with it. If a fund house thinks about a company as great, but it does not turn out to be so, it will be a disaster. So one has to succeed amid all these challenges and then maintain its replicability as well. Because when a fund starts performing well, more investors start pouring money into that fund, making it hard for AMCs to invest meaningfully into small- and mid-sized companies consistently. And for investors, it is a forced diversification with a minimum 25 per cent investment into mid-, and small-cap. So let multi-caps build the case for themselves and let them prove their mettle. You are not missing out on any great opportunity, so these NFOs are avoidable.

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