“Investor interest towards hybrid or multi-cap offerings has been gradually picking up given the rise in market volatility over the past few months,” said Harshad Borawake, head of research and fund manager, Mirae Asset Investment Managers (India).
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Also, meaningful money has flowed toward sectoral and thematic new fund offers. However, if the markets remain volatile and investors realize the importance of asset allocation during such times, one can expect continued allocation toward multi-cap and hybrid funds, he added.
The Nifty 50 is 7% away from its record high. But the benchmark indices have shown little movement over the past month, and market experts suggest that the lack of fresh triggers may keep them range-bound in the near term and a clearer direction may not emerge until February.
Quest for stability
Market participants believe multi-cap and hybrid funds are the best for long-term investors who prefer a steady, diversified approach with moderate risk. These funds allow them to rest easy, knowing their investments are well spread out. On the other hand, factor and thematic funds are suited for risk-tolerant investors targeting specific trends or sectors, offering strong returns but requiring an active, hands-on approach.
Multi-cap funds allocate at least 25% each to large-, mid- and small-cap stocks, offering broad exposure across market segments. They are also more diversified, or stock- and sector-specific, as compared to thematic funds which focus on a narrower investment universe.
Hybrid funds, with their mix of equities, debt, arbitrage and commodities, provide even more diversification. In contrast, factor-based funds have varying risk-return profiles depending on the factors they target—such as momentum or quality—and the market-cap segments they invest in.
Diversified and hybrid funds have generally given a much better risk-adjusted return in economic downturns or during market corrections, said Devender Singhal, executive vice-president and fund manager at Kotak Mahindra Asset Management Co.
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Flexi-cap, where fund managers have discretion to move from one market-cap category to another, and multi-cap strategies have a better opportunity to create alpha than plain vanilla strategies, Singhal said. Alpha refers to the excess returns relative to a benchmark.
According to Singhal, multi-cap funds are ideal for long-term wealth generation and suit all types of investors. Using systematic investment plans for extended periods offers a better investing experience. Hybrid funds are a good option for those seeking lower volatility but still aiming for long-term growth.
He added that factor and thematic funds are more suitable for experienced investors looking to complement their core positions. They offer opportunities to capitalize on specific market views for a defined period.
Performance report
Until the correction hit, investors made decent returns across all types of funds, especially mid- and small-cap, and thematic/sectoral funds, said Abhishek Tiwari, chief business officer of PGIM India Mutual Fund. However, he pointed out that “in the last three months, funds with a diversified mandate have protected the downside better than thematic/narrow strategies.”
Chintan Haria, principal, investment strategy, ICICI Prudential Mutual Fund, said multi-cap and hybrid funds have a broader appeal with most investors given their balanced risk-reward profiles. Factor and thematic investments may not outshine the former set of funds over the long term due to their inherent cyclicality and higher risk.
For instance, during the 25% dip in the Nifty 50 Total Returns Index in 2019-20, many multi-cap funds weathered the storm better, losing less value, Haria said.
Similarly, conservative hybrid and arbitrage funds posted positive returns during the same period, providing a buffer for investors. While factor and thematic funds can outperform during certain cycles, their volatility can often lead to sharper declines or more pronounced swings during tough market conditions, he said.
According to Haria, combining these strategies in a portfolio can provide the best of both worlds for most investors.
The outlook
“The period FY21-1HFY25 was characterized by high-beta, risk-on sentiment and a retail-led, broad-based SMID-driven rally. During such high-beta bull cycles, disciplined long-term investing styles and principles often lose favour. Short-termism and greed prevail, leading to a rush down the quality curve and taking on higher risks,” explained Siddharth Bothra, fund manager, Ambit Pvt. Ltd. SMID is short for small and mid-cap.
In recent years, there has been a surge in retail mutual fund inflows into thematic funds, leading to overvaluations in some areas.
Thematic and sectoral funds recorded an inflow of ₹22,351.69 crore in June 2024, the highest in the calendar year until October. However, this inflow has since moderated to ₹12,278.78 crore as of October, according to data from Prime Database.
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Thematic funds focus on the most popular trends at any given time, which often results in inflated valuations and lower medium-term returns. Given that the broader market seems susceptible to downside risks due to stretched valuations and weakening earnings growth, Bothra said the risk-return profile is more favourable for flexi-cap or heavyweight-dominated funds.
“Conservative investors would be better off focusing on flexi-cap or hybrid funds over the next 3-6 months,” he said.
