SEBI takes steps to protect the interest of investors, to promote the development and to regulate the securities market. Keeping this objective in mind, SEBI issued a circular revamping the asset allocation for Multicap funds.
As per the new guidelines, multicap funds would have to invest atleast 75% of the total assets in equity investments. SEBI also mentioned minimum limits of sub categories under equity which is as follows:
Minimum 25% needs to be invested in each of the large cap, mid cap and small cap category respectively.
Please note that large-cap stocks are defined as the largest 100 stocks by market capitalization, mid-caps as the next largest 150 stocks and small-caps are all the stocks below the top 250 in size.
SEBI further added that all the existing Multi Cap Funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks (as per market capitalization) by AMFI, i.e. January 2021.
To get a better understanding of this new amendment, let us understand why SEBI felt there is a need for such a move. For this it is important to understand the meaning of Multi Cap funds first.
Multi cap funds
These are diversified mutual funds which can invest in stocks across market capitalization. That is, their portfolio comprises of large cap, midcap and small cap stocks.
Before this circular, SEBI rules did not prescribe any percentage allocations in Multi cap funds for large, mid and small-cap stocks. This means such funds had high level of flexibility to move between these market caps. For example, if the market does not perform up to the mark, a mid-cap fund is forced to remain invested in mid and small-cap stocks. However, a multi-cap fund could change the allocation more towards large cap. This is exactly what has happened in recent times.
On an average, most of the multi-cap funds currently allocated 70% of their portfolios to large-cap stocks, 22% to mid-cap stocks and just 8% to small-cap stocks.
The implementation of new circular will make multi-cap funds more true to its label. These funds are currently overwhelmingly large-cap, making the distinction between the multi cap and large cap, a marginal one.
In this regard, in order to diversify the underlying investments of Multi Cap Funds across the large, mid and small cap companies, it has been decided to partially modify the scheme characteristics of Multi Cap.
What will be the impact?
It will give much-needed relief to a largely ignored segment of the market – especially small cap companies. The market depth in the small caps is very weak .SEBI decision effectively reroutes some of the much-needed liquidity to the Small cap and midcap.
There will be a likely selloff in the large caps because SEBI has given a clear mandate that small and midcaps should at least constitute 50% of the current holdings of a multi cap mutual fund. A minimum of around 25% selloff could be expected in large-caps. As the total AUM of the multi cap universe is around 1.46 lakh crores, approximately 25% selloff comes around to be 36,000 crores.
Options available to Fund Managers
It is not mandatory that all Multi Cap Funds will continue to remain in the Multi Cap category and be forced to increase small- and mid-cap exposure to 25 per cent each. Asset Management Companies have 2 more options for their multicap. It is detailed as follows:
1) Shifting to a new category – Fund managers may look at moving the scheme to another category such as focused or thematic to avoid the rigidity of the new rules. Such shifts in fund structures might soften the shock of heavy flows into mid- and small-caps. Further, AMFI has requested SEBI for introducing a new Flexi cap category.
2) Merging with another category scheme – Mutual funds might just merge schemes. Instead of needlessly taking risks, it expected that many AMCs might just merge their multicap schemes with their existing large-cap schemes.
Related Article : SEBI’s new Mutual fund circular. What NAV will be applicable?
What should you as an Investor do?
The revised asset allocation for Multi Cap Funds would drastically change the risk of the funds. However, those invested in Multi Cap Funds should avoid sudden reaction to the revised norms by exiting those funds immediately. It is suggested that multi Cap Fund investors should wait for more clarity from their fund houses regarding how they would take a decision on their existing Multi Cap Funds to comply with revised norms.
The fund houses are free to implement the SEBI guidelines for their existing Multi Cap Funds; or rebrand their existing Multi Cap Funds or merge with other fund categories like Focused Funds, Large Cap Funds, Value Funds, ‘Large and Midcap’ Funds, etc. Most of the fund houses are likely to decide keeping in mind their investors’ interest and portfolio quality.
But in case the decisions of individual fund house do not suit the risk profile of investors, then in such case informed decision should be taken after consulting a financial advisor on overall asset allocation of the portfolio.
To conclude, it is highly recommended to not take any immediate decision on your multi-cap funds. It is further suggested to wait for more clarity on how each fund house is planning to handle this transition and consult your financial advisor before taking a decision.