Dynamic asset, Multi-asset, Multi-cap: What’s the difference?

Sep 17, 2020

With 38 scheme categories to choose from, filtering funds within each category that match your investment goals can be a herculean task. Now, the latest diktat from the Securities and Exchange Board of India, or SEBI, had added to the confusion.

So here’s to explaining what a multi-cap fund is, and how it differs from a dynamic asset allocation fund and multi-asset allocation fund.

Multi-Cap Funds

These funds must have a minimum of 65% exposure to equity.

They have the agility to move across market capitalisations (large, small and mid cap) depending on the fund manager’s view and relative market valuations. The SEBI mandate has amended that. Now, such funds have to hold a minimum of 25% allocation each market cap (small, mid and large). This was introduced to correct the discrepancy that some multi-cap funds held as high as 80-90% in large caps.

SEBI’s rationale is that it was necessary to define such caps to distinguish multi cap schemes from other category of funds. However, this constricts the ability of fund managers to move across market caps where they find value.

In response to the concerns raised by the industry, SEBI has extended the deadline to comply with the new norm from October 1, 2020 to January 31, 2021. The regulator said that it is open to hearing the industry’s feedback in this regard.

To comply with SEBI’s diktat, fund houses have multiple options. Apart from rebalancing their portfolios in multi-caps funds, they can give an option to investors to switch to other fund categories, merge their multi-cap funds with large-cap funds or convert their multi-cap funds into another fund such as large and mid-cap scheme, value funds or dynamic asset allocation where fund manager finds enough flexibility.

Multi caps have been the most preferred choice of funds for investors as they could leave the decision to capitalise on opportunities across the market with the fund manager. It is not surprising that multi-cap funds managed the second highest assets under management at Rs 1.46 lakh crore (as on August 2020).

Dynamic Asset Allocation or Balanced Advantage Funds

These funds actively manage their equity and debt allocation depending on market valuations.

They are grouped under the hybrid category and are benchmarked against the Hybrid Composite index.

Each fund is free to choose the methodology for deciding when to increase or decrease allocation to equities. Most often, fund managers use Price to Earnings (P/E) ratio, Book to Value, interest rates, and medium to long term outlook of the economy and markets while taking a call on the exposure.

HDFC Balanced Advantage Fund is the largest fund in this category. Its equity allocation has increased from 78% in August 2018 to 83% in August 2020.

As compared to multi-cap funds, such funds could offer better downside protection when there is a correction in markets, depending on how much allocation the fund manager has towards equities. SEBI does not mention any lower or upper cap on the quantum of exposure this category can have in debt and equity. Thus, these funds can go 0-100% in either debt or equity.

Investors should look at the portfolios of dynamic asset allocation/ balanced funds closely to see if the funds hold credible debt paper in their debt allocation.

Multi-Asset Funds

These funds invest a minimum of 10% each in a mix of three asset classes – equity, debt and gold. Holding foreign securities is not permitted under this category.

Gold has had a stellar run during the pandemic. If one had invested in this category, they could have benefitted from the gold’s rally to some extent.

  • How is this dynamic asset allocation different from multi-cap?

Dynamic asset allocation funds could attract debt fund taxation if the equity exposure is below 65%. On the other hand, multi caps are purely equity funds; they will not have a large exposure to debt or cash.

Dynamic asset allocation funds have the flexibility to invest across market caps (large, mid, small cap). Multi-cap funds now have restrictions of a minimum 25% in each market cap (large, mid, small).

  • What should you do with your existing multi-cap funds?

We advise investors to stay invested for the meanwhile and consult their financial adviser before exiting or moving your money from multi-cap funds to other funds.

Investment Involves Risk of Loss.
Add a Comment
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Jan 20 2024 05:44 PM
Clearly explained
Nov 22 2020 09:09 PM
nagarajan balasubramanian
Nov 16 2020 07:39 PM
Simple, and good article gives clarity
Ravi Samalad
Sep 22 2020 08:34 PM
Hi Satish,

The new norms related to multi-cap funds do not apply to Focused Funds. Focused funds are allowed to invest in a maximum of 30 stocks.

SEBI does not stipulate any market cap restriction when it comes to Focused funds. They have to invest a minimum of 65% in equity.

Hope this clarifies.

Ravi Samalad
Satish Patankar
Sep 22 2020 04:31 PM
Is the new SEBI rule for multi-cap funds applicable to focused funds like Axis Focused 25 and SBI Focused Equity?
nagarajan balasubramanian
Sep 19 2020 11:07 AM
Very useful clarification and explained well in a lucid manner
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