Should you invest in SBI Multicap Fund NFO

SBI mutual fund will shortly be in launching a New Fund Offer (NFO) for a multicap equity fund, SBI Multicap Equity Fund. The NFO launches on February 14 and closes on February 28, 2022. Even though multicap funds were very popular, there are currently not that many multicap funds after SEBI made changes in its mandate for multicap funds in 2020. Let us first understand what different market cap segments are and how multicap funds invest.

Market cap segments

Market capitalizationof a company is defined as current share price of the company multiplied by the number of shares outstanding. SEBI has categorized listed companies into three segments based on their market capitalization -

1. Large cap: According to SEBI, the largest 100 companies by market capitalization are classified as large cap companies.


2. Midcap: 101^st to 250^th companies by market capitalization size are classified as midcap companies. There are 150 midcap stocks.


3. Small cap: 251^st and smaller companies by market capitalization are classified as small cap companies.

Characteristics of different market cap segments

• Large caps: These are dominant players with mature businesses and long term track records. As stocks they are highly liquid with reasonably high trading volumes.


• Midcaps: Midcaps of today have the potential of becoming large caps in the future. Midcaps usually have higher growth prospects compared to large caps. Midcap companies are usually emerging type businesses.


• Small caps: Small cap stocks can be quite illiquid and volatile depending on market conditions. However, small cap stocks have the potential to give multi-bagger returns. These stocks are also relatively less researched than large and midcaps, and therefore have better opportunities for price discovery.

What are Multicap Funds?

Multicap mutual funds are diversified equity mutual fund schemes which invest across market cap segments i.e. large cap, midcap and small caps. As per SEBI’s circular in September 2020, multicap funds must invest at least 25% of their assets in large cap stocks, at least 25% in midcap stocks and at least 25% in small cap stocks. Investors should note that multicap funds will have minimum 50% exposure to midcaps and small caps. You should invest according to your risk appetite.

Benefits of Multicap strategy

• Different segments of the market outperform each other in different market conditions (see the chart below). Large caps usually outperform small and midcapsin bear markets. Midcap and small cap stocks tend to outperform in bull markets.
  
  

  Source: National Stock Exchange, Advisorkhoj Research, as on 31.12.2021. Nifty 100 TRI represents large cap, Nifty Midcap 150 TRI represents midcap and Nifty Small Cap 250 TRI represents small cap stocks. Disclaimer: Past performance may or may not be sustained in the future.



• Lower downside risks: The table below shows the 5 biggest drawdowns in the market in the last 10 years or so and the impact on various market capitalization segments. You can see that large caps are considerably less volatile than midcap and small cap stocks. Multicap funds can have 50% allocation to large caps.
  
  

  Source: National Stock Exchange, Advisorkhoj Research (as on 31^st December 2021). Nifty 100 TRI represents large cap, Nifty Midcap 150 TRI represents midcap and Nifty Small Cap 250 TRI represents small cap stocks. Disclaimer: Past performance may or may be sustained in the future.



• Potential of generating alphas: Large cap stocks have high percentage of institutional ownership, are more researched and therefore have better price discovery. Opportunities of alpha creation are higher in midcaps and small caps, which are less researched compared to large cap stocks. Multicap fund managers may be able to find quality mid and small cap stocks at attractive valuations, thereby creating alphas for investors over long investment horizons.


• Wealth has grown across all segments: Market Capitalisation has grown 4.7 to 7.5 timesacross all three market cap segments i.e. large cap, midcaps and small caps over the last 10 years. This indicates increased investor participation in the equity market. Though large caps have traditionally been favoured by retail investors, the market cap growth in midcap and small cap segments over the last 10 years is an indication of investors’ confidence in the wealth creation of potential of equity as an asset class across all three market cap segments.
  
  

  Source: SBI Mutual Fund. Disclaimer: Past performance may or may be sustained in the future.

Why invest in SBI Multicap Fund?

SBI Mutual Fund has a proven track record of delivering superior performance across product categories i.e. large cap funds, mid cap funds and small cap funds.

The chart below shows returns of Rs 100,000 in the market index Nifty 500 Multicap 50:25:25 TRI and a portfolio of existing equity schemes from SBI MF stable in the same proportion of market cap mix as the index i.e. large cap 25%, midcap 25% and small cap 25%, over different investment tenures e.g. 3 years, 10 years. You can see that the portfolio was able to create alphas in both the scenarios.

SBI MF’s long term track record gives us the confidence about SBI Multicap Fund’s alpha creation potential in the future too.

Source: National Stock Exchange, Advisorkhoj Research (as on 31^st December 2021). SBI Bluechip represents large cap, SBI Magnum Midcap represents midcap and SBI Small Cap Fund represents small caps. Scheme performances in the table are for regular plans. The performance analysis above is purely for illustrative and is not indicative of SBI Multicap Fund’s future returns. Disclaimer: Past performance may or may be sustained in the future.

Investment strategy of SBI Multicap Fund

• Unconstrained, sector agnostic approach.


• Active Stock Management with Bottom-up strategy.


• High Conviction Play through Analyst Portfolio.


• Style Agnostic with broader opportunity set for stock selection.


• Strong pedigree of Investment Expertise across market cap.

Who should invest in SBI Multicap Fund?

• Investors who are looking for capital appreciation over long investment horizon.


• Investors with high to very high risk appetites.


• Investors with minimum 5 years investment tenures.


• You can invest in this scheme either in lump sum or SIP depending on your investment needs.


• The NFO will open for subscription on February 14^th 2022 and close on February 28^th 2022.

Investors should consult with their financial advisors if SBI Multicap Fund is suitable for their investment needs.