Multi-caps versus Flexi-Caps – Who is winning the mixing game?

7 Jun 2024 , 08:50 AM

HOW FLEXI CAP FUNDS CAME ABOUT IN INDIA?

Flexi Cap Funds as a category is of recent origin in India. It is a different matter that at ₹3.26 Trillion, it is the largest equity fund category in terms of AUM. But, did you know that the idea of flexi cap funds just dates back to November 2020. There is an interesting background to it. In its original form, it only existed as multi-cap funds. Now, SEBI had a problem. There were called multi-cap funds, giving an impression that they would spread the funds across large caps, mid-caps, and small caps. However, in reality, they had a much smaller exposure to mid-caps and small caps (due to liquidity reasons) and also did more of cycle timing and active management. That is when SEBI it was time for change.

In November 2020, the SEBI finally decided that all such funds would be classified into 2 separate categories viz. multi-cap funds and flexi-cap funds. Flexi cap funds will retain the discretion on how much to allocation to large caps, mid-caps, and small caps. The only condition was that at least 65% of the corpus must be in equities to qualify as an equity fund. Otherwise, the fund manager was free to mix large-caps, mid-caps, and small caps in the proportion of their choice based on their judgement of how markets were evolving. The original multi-cap funds were made more rigid in structure. For instance, multi-caps have to necessarily allocate at least 25% of the corpus separately to large caps, mid-caps, and small caps. The balance 25% is where the fund managers had a discretion.

NET FLOWS – MULTI-CAP FUNDS VERSUS FLEXI-CAP FUNDS

As we have underlined time and again, AUM has certain limitations in that they comprise of flows and value accretion. Hence a better gauge of popularity would be the net flows into the fund category each month. The table below captures the monthly flows into flexi cap funds and multi-cap funds over the last 2 years.

Data Month	Multi-Caps (₹ in Crore)	Flexi-caps (₹ in Crore)	Data Month	Multi-Caps (₹ in Crore)	Flexi-caps (₹ in Crore)
May-22	1,265.01	2,938.93	May-23	104.55	-367.73
Jun-22	970.24	2,511.74	Jun-23	734.68	-17.30
Jul-22	524.01	1,381.55	Jul-23	2,500.47	-932.17
Aug-22	392.66	2,099.98	Aug-23	3,422.14	2,192.86
Sep-22	724.71	2,401.20	Sep-23	2,234.52	1,353.51
Oct-22	889.26	465.03	Oct-23	2,910.75	2,168.65
Nov-22	170.49	-863.43	Nov-23	1,713.09	1,667.56
Dec-22	676.14	403.50	Dec-23	1,851.87	1,087.45
Jan-23	1,773.02	1,005.62	Jan-24	3,038.67	2,447.03
Feb-23	1,977.36	1,802.00	Feb-24	2,414.04	2,613.23
Mar-23	716.97	1,106.60	Mar-24	1,827.45	2,738.11
Apr-23	206.27	550.90	Apr-24	2,723.87	2,172.93
Total	10,286.14	15,803.62	Total	25,476.10	17,124.13
	GRAND TOTAL			35,762.24	32,927.75

Data Source: AMFI

We have shown the data of net flows into flexi cap funds and multi cap funds on a monthly basis for the last 2 years. The left side is the previous year and the right side is the latest year. Here are some key takeaways from the data.

• In the previous year (May 2022 to April 2023), the flows into flexi cap funds at ₹15,804 Crore was higher than the net flows into multi-cap fund at ₹10,286 Crore.
• However, the situation changes sharply in the latest year (May 2023 to April 2024). In this period, the flows into flexi-caps as ₹17,124 Crore was sharply lower than the flows into multi-cap funds at ₹25,476 Crore.
• That was not all. In the latest year, there were 3 months in a row when flexi cap fund saw negative flows. Overall, in the last 2 years, flexi cap funds saw negative flows in 4 months, while multi-cap fund did not have negative flows in any month.

Clearly, if flows favoured flexi cap funds in the previous years, they favoured multi-cap funds in the latest year. To understand whether this is a casual shift in data or reflection of a trend, let us look at the larger picture of returns on both the categories of funds.

MULTI CAP FUNDS – HOW MUCH DID THESE FUNDS EARN?

The table below captures the returns on multi-cap funds in India over two time periods; over the last 1 year and since inception.

Scheme Name	NAV Direct	Returns (%) 1-Year	Returns (%) Launch	Daily AUM (₹ in Crore)
Kotak Multicap Fund	17.78	54.52	23.89	11,474.95
HSBC Multi Cap Fund	16.85	52.56	47.24	3,100.44
Quant Active Fund	713.10	49.77	21.97	9,781.56
ITI Multi Cap Fund	24.23	49.13	19.10	1,150.96
Nippon India Multi Cap Fund	289.97	47.78	17.71	31,851.95
Axis Multicap Fund	15.69	45.28	19.99	5,414.82
Bank of India Multi Cap Fund	15.85	43.96	44.12	518.31
HDFC Multi Cap Fund	17.62	43.76	25.47	13,763.69
ICICI Prudential Multicap Fund	779.23	43.35	17.46	12,128.72
Mahindra Manulife Multi Cap Fund	35.30	43.05	19.52	3,584.89
Baroda BNP Paribas Multi Cap Fund	284.60	41.90	16.25	2,410.39
LIC MF Multi Cap Fund	15.01	41.42	28.97	1,046.01
Invesco India Multicap Fund	133.95	39.17	19.26	3,346.21
Sundaram Multi Cap Fund	373.17	38.70	17.57	2,536.21
Bandhan Multi Cap Fund	16.06	37.46	20.76	2,118.20
Union Multicap Fund	14.34	36.44	27.94	911.10
Aditya Birla Sun Life Multi-Cap Fund	18.43	35.32	21.94	5,557.80
SBI Multicap Fund	14.96	33.28	19.63	16,030.90
Tata Multicap Fund	13.56	26.81	25.50	3,014.44

Data Source AMFI

In the above case, we have considered the direct plans to avoid the impact of differential TERs. Here is what we read from the performance of multi-cap funds in India.

• How did the multi-cap funds perform on a 1-year returns basis. The maximum returns in the category was 54.52%, while the minimum returns were 26.81%, which is fairly impressive. The average returns on the fund category was 42.30%. The alpha factor at 1.5260 indicate that the average returns managed to give positive alpha to the investors.
• How did these multi-caps perform if you look at returns since inception? The maximum returns in the category was 47.24%, while the minimum returns were 16.25%, which is fairly impressive. The average returns on the fund category was 23.91%. The alpha factor at 0.771 indicates that the volatility as measured by the range of high and low returns was much higher over longer time frames.
• Did the multi-cap funds outperform the benchmark. The benchmark returns were 40.09%. At an average return of 42.30%, the multi cap funds as a category managed to outperform the category by 221 basis points. That is impressive. Also, out of the 19 multi-cap funds in the list, 12 multi-cap funds managed to outperform the benchmark returns. That means, even if you had selected a multi-cap fund at random, you would have stood a minimum 63.2% probability of beating the benchmark index.

Despite being rule based, the multi-cap funds have done very well; both in terms of isolated returns and also in comparison with the benchmarks. Let us now turn to how the flexi cap fund performed.

FLEXI-CAP FUNDS – HOW MUCH DID THESE FUNDS EARN?

The table below captures the returns on flexi-cap funds in India over two time periods; over the last 1 year and since inception.

Scheme Name	NAV Direct	Returns (%) 1-Year	Returns (%) Launch	Daily AUM (₹ in Crore)
Quant Flexi Cap Fund	110.01	59.72	21.49	6,223.79
Bank of India Flexi Cap Fund	33.98	57.46	36.44	975.47
JM Flexicap Fund	103.44	56.51	19.21	2,407.49
Motilal Oswal Flexi Cap Fund	55.38	46.52	18.44	10,069.61
ITI Flexi Cap Fund	16.30	45.56	45.66	985.60
Invesco India Flexi Cap Fund	16.56	44.88	24.44	1,694.72
HDFC Flexi Cap Fund	1,842.04	41.27	17.31	55,043.19
Franklin India Flexi Cap Fund	1,611.50	41.24	17.55	15,482.88
HSBC Flexi Cap Fund	212.21	41.07	16.11	4,410.94
Shriram Flexi Cap Fund	23.07	39.79	15.83	106.30
Edelweiss Flexi Cap Fund	38.56	39.60	15.54	1,854.46
ICICI Prudential Flexicap Fund	17.37	38.41	21.05	15,109.76
Nippon India Flexi Cap Fund	16.03	38.04	18.32	7,070.12
Taurus Flexi Cap Fund	222.26	37.18	11.42	345.85
Baroda BNP Paribas Flexi Cap Fund	14.43	35.95	22.51	1,254.73
WhiteOak Capital Flexi Cap Fund	15.08	34.99	24.95	3,527.41
Mahindra Manulife Flexi Cap Fund	15.48	34.24	16.97	1,302.90
Kotak Flexicap Fund	84.59	33.96	17.43	47,898.02
Parag Parikh Flexi Cap Fund	78.09	33.68	20.48	67,097.19
DSP Flexi Cap Fund	99.18	33.16	16.00	10,501.49
Aditya Birla Sun Life Flexi Cap Fund	1,724.80	32.74	17.22	20,581.04
Bandhan Flexi Cap Fund	201.10	32.03	15.02	6,717.13
Union Flexi Cap Fund	50.54	31.96	14.31	2,050.86
Mirae Asset Flexi Cap Fund	14.09	30.15	30.70	1,875.06
LIC MF Flexi Cap Fund	99.77	29.79	11.90	998.50
Tata Flexi Cap Fund	23.05	29.75	15.63	2,798.06
Canara Robeco Flexi Cap Fund	333.27	29.53	15.47	12,511.53
Axis Flexi Cap Fund	25.62	29.52	15.46	11,971.28
Sundaram Flexi Cap Fund	13.42	26.79	18.33	2,076.25
SBI Flexicap Fund	110.73	24.98	16.70	20,686.30
Navi Flexi Cap Fund	23.71	24.97	15.72	251.91
PGIM India Flexi Cap Fund	36.58	21.41	15.03	5,913.07
Samco Flexi Cap Fund	12.06	20.48	8.36	641.46
UTI Flexi Cap Fund	301.29	18.15	14.61	24,374.63

Data Source AMFI

In the above case, we have considered the direct plans to avoid the impact of differential TERs. Here is what we read from the performance of flexi-cap funds in India.

• How did the flexi-cap funds perform on a 1-year returns basis. The maximum returns in the category was 59.72%, while the minimum returns were 18.15%, which is fairly impressive. The average returns on the fund category was 35.75%. The alpha factor at 1.860 indicates that the alpha generation of the category was below average.
• How did these flexi-caps perform if you look at returns since inception? The maximum returns in the category was 45.66%, while the minimum returns were 8.36%, which is very low. The average returns on the fund category was 18.87%. The alpha factor at 0.0.506 indicates that the volatility as measured by the range of high and low returns was much higher over longer time frames.
• Did the multi-cap funds outperform the benchmark. The benchmark returns were 40.09%. At an average return of 35.75%, the flexi-cap funds as a category managed to underperform the category by -434 basis points. That is not too flattering. Also, out of the 29 multi-cap funds in the list, only 9 flexi-cap funds managed to outperform the benchmark returns. That means, even if you had selected a flexi-cap fund at random, you would have stood a 31% probability of beating the benchmark index.

The discretion to the fund manager was supposed to give an edge to the fund, but it looks like the flexi-cap funds have not been able to match up to the performance of the multi-cap funds. Clearly, discretion has been less of a boon and more of a bane for investors.

ARE INVESTORS NOT IMPRESSED WITH DISCRETION TO FUND MANAGERS?

A quick comparison tells you that the multi-cap funds as a category have performed better than the flexi-cap funds. While the discretion of flexi-cap funds has created a small set of funds giving superior funds, the dispersion is too large and that is creating problems in stock selection for investors. In contrast, the multi-cap funds are rule based and hence the performance of these multi-cap funds is more in sync and the dispersion is lower. That makes multi-cap funds more predictable from a long term perspective, something that is key to fund selection for long term financial goals.

It is not that investors are averse to discretion. For instance, the thematic funds, sector funds, small cap funds and mid-cap fund are attracting a lot of investors interest. Most investors do believe that it is worthwhile taking on the higher risk in search of alpha. However, the discretion in flexi-cap funds is more with respect to the mix of large caps, mid-caps, and small caps. Investors have not seen too much value in that type of discretion. That could explains why the fund flows which favoured flexi-caps a year back. Is now favouring multi-caps over flexi caps.

Of course, there is a caveat here. We are basing our inferences largely on 1-year data. Also, the returns since launch is a very fluid figure and hard to compare. However, the real takeaways from this comparison is something much bigger. Flexi cap funds and the fund managers really need to benchmark their performance against multi-cap funds and see if they are really adding value to investors. That is the Million dollar question!