Multi Cap Fund Matchup: Nippon India Multi Cap Fund vs Quant Active Fund

May 27, 2024 Mutual Fund

Over the past couple of years, the Indian stock market has witnessed a sustained period of positive trend, driven primarily by a remarkable resurgence in mid and small-cap stocks. This resurgence has been complemented by significant advancements in major large-cap indices.

The impressive rally in the mid and small-cap segments has played a crucial role in propelling the overall Indian stock market to unprecedented record levels. Notably, the recent performance of mid and small-cap stocks has been exceptionally remarkable, outpacing the growth of their larger-cap counterparts and helping boost the performance of the broader markets.

Multi Cap Funds have benefitted immensely from the broad-based rally in the equity market over the past few years.

What are Multi Cap Funds?

Multi Cap Funds are equity mutual funds that invest across large, mid, and small-cap companies, thus offering diversification across the market cap spectrum through a single fund. These funds are required to maintain a minimum exposure of 25% in each segment, regardless of the market conditions. With substantial exposure across the investment universe, Multi Cap Funds can potentially generate superior returns for investors in the long run without any concentration risk.

Multi Cap Funds offer investors a mix of high growth potential through exposure to mid-cap and small-cap stocks, as well as stability from investments in large-cap companies. This balanced approach aims to cater to various investor preferences and risk appetites. Multi Cap Funds can perform differently in various market conditions. During bullish phases, they may lean towards smaller and mid-sized companies for potential high growth, while in bearish markets, they might shift towards larger, more stable companies for safety.

This comprehensive analysis deep dives into a parallel comparison of two popular Multi Cap Funds namely Nippon India Multi Cap Fund and Quant Active Fund. It can equip you with the knowledge to make an informed investment decision.

About Nippon India Multi Cap Fund

Launched in March 2005, Nippon India Multi Cap Fund is the erstwhile Reliance Equity Opportunities Fund that was later renamed as Reliance Multi Cap Fund after its categorisation under Multi Cap Funds. Unlike most of its peers that preferred to maintain a large-cap-biased portfolio and later migrated to the Flexi Cap Fund category, Nippon India Multi Cap Fund has always been a true-to-name Multi Cap Fund that holds a well-balanced allocation across market caps.

With an AUM of Rs 30,500 crore Nippon India Multi Cap Fund is the largest scheme in the Multi Cap Fund category. The fund has done well and flourished under the supervision of Mr Shailesh Raj Bhan, who aims to identify high-growth potential and fundamentally sound stocks across industries but that are available at reasonable valuations.

About Quant Active Fund

Quant Active Fund is a Multi Cap Fund that was launched in March 2001 by Escorts Mutual Fund. Notably, the AMC was later acquired by the Quant Group in 2018 and the scheme was renamed. Earlier, in the absence of any allocation limit for Multi Cap Funds, Quant Active Fund used to dynamically manage exposure across market caps depending on the market conditions and generally maintained a large-cap biased portfolio with tactical allocation to mid and small-caps. It now maintains an on-par exposure across market caps

The past performance of Quant Active Fund was ordinary and it struggled to maintain a sustainable lead over the benchmark and the category average. However, in recent years, the fund has maintained a strong track record and ranked among the top performers in the Multi Cap Fund category. This helped it emerge as the third largest scheme in the Multi Cap Fund category having an AUM of 9,790 crore.

What is the Investment style and strategy?

Nippon India Multi Cap Fund aims to seek both growth and value stocks that are likely to benefit from the growth in the economy, with a special focus on high ROE companies. It adopts a blend of the ‘top-down’ and ‘bottom-up’ approach to stock selection and takes active sector calls. While picking stocks the fund endeavours to identify opportunities ahead of the market, even though it may result in underperformance in the short term.

Nippon India Multi Cap Fund prefers to avoid momentum-driven bets and focuses on high-conviction long-term bets. It emphasises building a portfolio comprising a combination of market leaders, sustainable alpha creators, and emerging/niche themes. Though the fund currently has a low turnover ratio of around 30-35%, it does not hesitate to occasionally churn a portion of the portfolio to benefit from sector/stock-specific opportunities.

In terms of Quant Active Fund, till early 2021, the fund followed a dynamic investment approach to invest across market caps without any limits. However, it now follows the revised investment limits for Multi Cap Funds as defined by SEBI. Unlike Nippon India Multi Cap Fund, Quant Active Fund follows a momentum-based strategy to identify attractive-looking opportunities across stocks and sectors. It selects stocks by analysing them on its proprietary VLRT framework, which assesses the stocks on their valuations, liquidity, risk, and timing.

Quant Active Fund follows an aggressive investment approach wherein it constantly looks for opportunities to generate high alpha. In other words, the fund holds many of its stocks with a short-term view, and as a result, the fund has recorded a high portfolio turnover of around 80-285% in the last one year.

How does the performance of the funds compare based on rolling returns?

After a period of muted growth between 2019-20, Nippon India Multi Cap Fund has recovered and outpaced Quant Active Fund by around 8.5 percentage points in the last 1-year period, and by 2 percentage points over a 3-year period on a rolling return basis. Meanwhile, over the longer, 5-year, 7-year, and 10-year periods, Quant Active Fund has emerged as a category leader. Notably, its stellar performance in recent years has likely boosted its long-term returns.

Performance comparison based on rolling returns

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as of May 22, 2024
(Source: ACE MF, data collated by PersonalFN) 

Quant Active Fund and Nippon India Multi Cap Fund have also outpaced the broader Nifty 500 – TRI across time frames. When compared to the category average too both schemes stand as top-performing candidates across time frames.

Both schemes have displayed noteworthy long-term returns, with Quant Active Fund currently faring better than most of its peers and the benchmark.

What is the market cap allocation of the funds?

Classified as Multi Cap Funds, both Nippon India Multi Cap Fund and Quant Active Fund are mandated to invest a minimum of 25% of their assets each in large-cap, mid-cap, and small-cap stocks.

Break-up of market cap allocation

Holding in (%) as of April 30, 2024
(Source: ACE MF, data collated by PersonalFN) 

As of April 30, 2024, Nippon India Multi Cap Fund was fully invested in equities. It invested 41.4% of its assets in large-cap stocks, along with 26.5% in mid-cap stocks, and 31.1% in small-cap stocks. Its market cap allocation has not witnessed major fluctuation in the last one year. On the other hand, Quant Active Fund is quick in its approach to shift allocation between market caps depending on the market conditions. The fund currently holds 37.7% of its assets in large caps, and about 25% each in mid-cap and small-cap stocks. It also held an allocation of 7.7% in Derivatives – Futures for hedging purpose.

How do the funds fare on risk-return profile?

Quant Active Fund frequently churns its portfolio which has resulted in higher volatility compared to its peers and the benchmark. On the other hand, Nippon India Multi Cap Fund has registered reasonable volatility which is nearly in line with the category average and the benchmark.

How have the schemes fared on risk ratios

Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of May 22, 2024
(Source: ACE MF, data collated by PersonalFN) 

In terms of risk-adjusted returns, as denoted by the Sharpe and Sortino ratios, Nippon India Multi Cap Fund clearly stands out, much ahead of its peers and the Nifty 500 index. Quant Active Fund too has outpaced the Nifty 500 index but has trailed some of its peers.

What are the top portfolio holdings of the funds?

Multi Cap Funds have the flexibility to invest from a large universe of stocks which allows them to identify high alpha opportunities.

Top portfolio holdings of the schemes

Holding in (%) as of April 30, 2024
(Source: ACE MF, data collated by PersonalFN) 

Nippon India Multi Cap Fund usually holds around 90-100 stocks in its portfolio. As of April 2024, Nippon India Multi Cap Fund held a large portfolio of 104 stocks, with the top 10 stocks accounting for 33.7% of its assets. Names like HDFC Bank, Linde India, EIH, ICICI Bank, and Axis Bank, currently figure among its top portfolio holdings. It is noteworthy that Nippon India Multi Cap Fund has a long tail of over 75 stocks having an allocation of less than 1% in each. These stocks account for around 37.5% of its assets and many of these small-exposure stocks have been in the portfolio for well over a year now.

Quant Active Fund usually holds 45-55 stocks in its portfolio. As of April 2024, Quant Active Fund held 51 stocks in the portfolio with the top 10 stocks accounting for 43% of its assets. Reliance Industries, JIO Financial Services, IRB Infrastructure Developers, Aurobindo Pharma, and Punjab National Bank currently form part of the fund’s top allocation. The fund’s top holding witnesses frequent changes. Only a handful of stocks, such as Reliance Industries, IRB Infrastructure Developers, and Punjab National Bank have constantly found a place among the prominent contenders in the fund’s portfolio.

What is the expense ratio of the schemes?

The expense ratio of Quant Active Fund under the Direct plan is substantially lower than that of Nippon India Multi Cap Fund. Meanwhile, under the Regular Plan, Nippon India Multi Cap Fund offers a cost advantage, which can result in higher net returns for investors.

Expense ratios of the schemes

Data as of April 30, 2024
(Source: ACE MF) 

Do note that a lower expense ratio can translate into potentially higher returns over time. Over the long term, even a seemingly small difference in Expense Ratio can make a big difference to your overall returns. However, it should not be the sole parameter for selecting a scheme for your portfolio.

Are the schemes suitable to your risk profile and investment goals?

With a focus on long-term growth, Nippon India Multi Cap Fund aims to identify high-growth-potential stocks by following the ‘Growth At Reasonable Price’ approach. At an AUM of over Rs 30,500 crores, Nippon India Multi Cap Fund maintains a highly diversified portfolio comprising a large number of stocks spread across various market caps and sectors/industries. While the fund aims to steer clear of chasing market momentum, it has done well to identify long-term high-growth opportunities available across market cap segments.

While Nippon India Multi Cap Fund is not a great bear market performer, its performance during bull phases has been commendable. Its focus on maintaining a balanced allocation in fundamentally sound large-cap, mid-cap, and small-cap stocks helps it perform in line with the broader markets and do well over complete market cycles

Nippon India Multi Cap Fund is suitable for investors looking to benefit from a potential broad-based market growth through a static allocation across market caps with a long-term view of at least 5-7 years.

On the other hand, while Quant Active Fund’s performance past performance was rather unimpressive, since 2020, the fund has registered robust growth and has created an impressive performance track record. The fund now stands among the category-toppers across medium to longer time frames. Quant Active Fund’s active investment approach and the ability to timely identify multi-bagger ideas have helped it generate a remarkable lead over the benchmark and its prominent peers.

Although Quant Active Fund frequently churns its portfolio and carries a higher turnover ratio, it has managed to reward investors reasonably for the level of risk taken. The sizeable exposure to mid caps and small caps and the ability to timely identifying high-growth stocks, enables it to boost portfolio returns. It also holds significant allocation to large-cap stocks that can offer stability and steady growth to the portfolio.

It is suitable for investors with a high risk appetite for the aggressive portion of their investment portfolio with an investment horizon of at least 5-7 years.

Watch this video to check the best Multi Cap Funds for 2024:

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here