Why Market-cap classifications
India is a bustling marketplace with over 7,462 companies listed on the National Stock Exchange and Bombay Stock Exchange together. To make investments easy, these companies are segregated into different categories. Market capitalization is one of the most common classifications used to group companies by size. Based on the value of all the company’s outstanding shares, or, in other words, its market capitalization, there are 3 primary categories:
- Large Cap – market cap of ₹20,000 crore or more
- Mid-Cap – market cap is between ₹5,000 crore and ₹20,000 crore
- Small Cap – market capitalisation of up to ₹5,000 crore
Other than the market capitalization each of these categories has distinct features related to how they move on the market during bull or bear markets.
Large caps are stable companies that have established businesses, and strong balance sheets. These companies are able to weather market volatility better. But their growth is also slow and steady given their proportion.
Mid caps are companies with the potential to become large caps and have a higher room to grow faster than large caps. Their balance sheets may be vulnerable to high debt, market volatility, and extended recessions.
Small caps are smaller and nimble companies who are still figuring out their addressable market and growth. These companies are most vulnerable to volatility and overall a riskier investment than large or mid caps given their balance sheets might not be strong enough to weather extended market swings.
What is a Multi/Flexi-cap Fund Investment Strategy?
As an investor, given a moderate risk profile, it would be detrimental to place all your eggs in one of these baskets. An investor may rake in high profits by investing heavily in small caps but the risk of loss of capital is high when things turn south.
On the other hand, investing in large caps might help the investor get stable returns along with dividends, but the capital appreciation from these stocks will not be stellar.
Though mid caps bring forth the best of both worlds, the sway in these is very high due to institutional investors pushing and pulling investments from these companies based on market sentiment.
So how does an investor craft the perfect investment that is a mix of high growth rate and stability?
Flexi cap or multi cap funds can provide an answer! The terms “Multi Cap” and “Flexi Cap” strategically mean the same, but do have a difference in terms of investment, diversification & regulation.
What is a multi cap mutual fund?
Multi Cap funds diversify their equity investments by investing a minimum 25% each, in large-cap, mid-cap and small-cap stocks. This is a minimum requirement by SEBI and the fund manager is not privy to make changes in this ratio. The remaining 25% is at the discretion of the fund manager to allocate to either large, mid or small caps.
Due to this mandated allocation across stocks with different market capitalizations, multi cap funds are much safer and more stable than mid or small cap funds.
What is a flexi cap fund?
As opposed to multi cap funds, there is no fixed allocation investment rule in Flexi Cap across market capitalization. The overall rule is that 65% of investment needs to be in the equities asset class.
There is no investment limit in Flexi Cap across all three caps. Fund managers can make an allocation to equities as per the requirement and risk profile of the investor class.
Let’s take an example of flexi-cap vs mid cap fund:
Flexi cap funds are diversified across the stocks that fall under the large, mid and small cap. Mid cap funds invest in stocks that are a part of the mid cap stocks only.
Flexi cap funds are able to ride out market volatility much better due to the diversification of the investment basket. The allocation in the asset classes and market cap stocks can be based on the risk profile of the investor class investing in the fund.
Who should invest in multi cap/flexi cap mutual fund?
The next obvious question that comes to mind: “Is a flexi cap fund good?” or “Is a multi cap fund good?”
Flexi cap funds are ideal for non-aggressive investors with a moderate risk profile. The funds owing to their very nature are diversified. The investments in large caps provides a necessary stability to the portfolio and allocation to small and mid caps provides the growth.
The strategy for investment and performance are made for a long term view. Investors must consider their risk profile, investment horizon and fee structure of the fund.
The next time someone asks you for the best mutual funds to invest in, do include multi & flexi cap funds in your suggestions.
What is Nifty 500?
The Nifty 500 is an index brought by NSE. The index measures the performance of the market by putting together a sample of 500 of the largest companies across different segments (large, mid and small cap companies). The NIFTY 500 Index represents about 96.1% of the market capitalization of all stocks listed on NSE (March 29, 2019).
In the Nifty 500 index, the total weight of each size segment (Large, Mid and Small cap) is based on the total free float market capitalisation of all stocks falling within that size segment.
Nifty 500 index and its constituent stocks form the basis for other indexes too, like the Nifty 500 Multicap Index.
Nifty 500 is a great benchmark when it comes to multi cap space. Investors in multi caps use the Nifty 500 as their default benchmark. This is a good indicator of how the market is performing since it represents 500 out of the 7,462 companies listed in India across all market cap categories.
Even for Multi Cap Funds, the performance is always compared with this benchmark. Most actively managed funds try to beat the benchmark with their handpicked portfolios.
Put it this way, multicap & nifty 500 are highly representative of each other and have a relationship of instrument-default benchmark. Flexicap & nifty 500 may or may not be representative of each other due to the freedom a fund manager has in allocation of funds within different market cap stocks.
How has the Nifty 500 index performed?
Nifty 500 has grown at 11.71% CAGR from the last 5 years. Considering returns for the last 2 years, from the pandemic caused crash in March 2020 to the rebound in the index considered on March 2022, the returns have been 56%!
The overall Indian economy is projected to grow at 6.1% in FY2023 and more so going forward as and if the global inflationary pressures and geopolitical tensions ease off.
The growth prospects for 500 of India’s largest listed entities are also looking promising.
Investors look to broad indexes as benchmarks to help them gauge not only how well the markets are performing, but also how well they, as investors of the funds, are performing.
In the flexi-cap funds, the latest news, investments seem to find their way into flexi-cap funds more than multi-cap funds due to the volatile nature of the market in Aug-Sept 2022. Flexi-cap funds allow the fund manager to allocate more investments to large caps as opposed to at least 25% each on small and mid-caps in multi-cap funds.
