Financial planner Suresh Sadagopan has advised clients to stop all STPs from debt funds to multi cap funds
Mutual fund (MF) distributors are dissuading investors from putting fresh money in multi-cap funds until fund houses clarify how they would navigate the recent regulatory diktat.
Lump-sum investments and flows through systematic transfer plans (STPs) from debt funds to such schemes are being put on hold, said distributors. This could adversely impact flows into the schemes, which saw net outflows of over Rs 1,100 crore in August, and indirectly benefit other equity or debt categories as fresh allocations move there.
Investment through systematic investment plans
(SIPs) of less than Rs 50,000, however, are being continued on hopes the issue will be resolved in a month or two.
“Distributors are going slow on allocation to multi-caps as it looks unlikely that Sebi will roll back the circular,” said Amol Joshi, a distributor. He says it is better to invest separately in large-, mid- and small-cap funds, rather than do an auto allocation via multi-cap funds. So, instead of putting Rs 100 in multi-cap funds, it is better to allocate, say, Rs 55 in large-cap funds, Rs 25 in mid-cap funds, and the rest in small-cap funds.
Financial planner Suresh Sadagopan has advised clients to stop all STPs from debt funds to multi-cap funds. In a typical STP, money is parked in shorter-tenure debt funds, such as liquid, overnight or ultra-short term funds, and then moved to equity schemes
in a staggered manner. “We are in a wait-and-watch mode,” Sadagopan said.
Earlier this month, the regulator mandated multi-cap funds to allocate at least 25 per cent of their assets in mid-caps, as well as small-caps by February next year. Sebi later clarified that funds cannot only rebalance the portfolio in their multi-cap schemes but also facilitate the switch to other schemes and merge such schemes with large-cap schemes or convert them to another scheme category, such as large and mid-cap. Any such action will require fund houses to reach out to unitholders and give them a month’s notice. The industry is also lobbying for a new flexi-cap scheme that can invest across market capitalisation.
“Incrementally, there is likely to be a slowdown in flows but the panic has been contained after the clarification from Sebi,” said another distributor. “If the fund moves from one category to another, the tax impact on investors will be nil. Investors switching from one fund to another, however, can face tax implications.”
Switching from one scheme to another is treated as transfer and is subject to capital gains tax. In the case of equity-oriented funds, gains made within a year from the date of purchase is considered short-term and will be taxed at 15 per cent plus a surcharge. Gains after a year will be taxed at 10 per cent plus a surcharge.
Some of the large multi-cap fund schemes may opt to reclassify into or merge with the existing ‘large and mid-caps’ category, given the difficulty of managing sizeable AUMs with a high proportion of less liquid Indian mid- and small-caps, said a recent note by HDFC Securities. However, this mandate will still lead to forced inflows into mid- and small-caps over the next four months, especially small-caps, given the sizeable gap between existing and proposed holdings across most schemes, the brokerage said.
“Investors should remain disciplined and stick to fundamentals while selecting small-caps, given the fact that economic headwinds may persist for a while, and valuations for quality mid- and small-caps are not mouthwatering,” said Varun Lohchab, head-institutional research, HDFC Securities.