Multi-cap funds must invest 25% each in small, mid, large-cap stocks: Sebi

Experts said multi-cap schemes by definition should have adequate exposure to stocks across various market capitalisations
The Securities and Exchange Board of India (Sebi) has tweaked the definition of multi-cap schemes offered by mutual funds (MFs), a move that could trigger a churn in holdings worth Rs 65,000 crore.

The regulator has increased the minimum investment threshold in equity and equity-related instruments. It is now between 65 and 75 per cent of the fund’s corpus. 

More importantly, it has mandated that at least 25 per cent of the fund’s corpus should be deployed in large-caps, mid-caps and small-caps each.

Essentially, if a fund’s corpus is Rs 100, a multi-cap scheme will now have to invest at least Rs 25 each in the large-cap, mid-cap, and small-cap universe. The fund managers will have the discretion to invest the remaining Rs 25 in any category or to keep it as cash. 

Earlier, there was no such minimum threshold. So, a lot of multi-cap schemes’ investment skewed towards large-caps. As of August, there were 35 schemes in the multi-cap fund category. These funds have combined assets under management of Rs 1.47 trillion. According to industry players, multi-cap schemes currently have investments of Rs 96,000 crore in large-caps, about Rs 25,000 crore in midcaps and only Rs 14,000 crore in small-caps.

To realign themselves with the new definition, fund houses will have to dump large cap stocks worth Rs 22,000 crore. Further, they would have to buy shares from the midcap and smallcap universe worth Rs 12,000 crore and Rs 23,000 crore respectively. “The rule change will require many multi-cap funds to reallocate a significant portion of their holdings towards mid- and small-caps. Many multi-cap funds are currently run with large-cap bias,” said Kaustubh Belapurkar, director, fund research, Morningstar Investment Advisers India. 

Many multi caps schemes at present have exposure of more than 80 per cent towards largecaps. These schemes will see the maximum churn.

Some experts said the realignment could distort the market as smallcaps and midcaps may not be able to absorb huge high quantum of buying. Many expect several high-quality small and midcaps to rally next week as fund managers are expected to begin the process of realignment.

“The fallout of the rebalancing would be visible in the equity markets with the small-cap index likely to sharply outperform with buying interest from domestic institutions in the coming months. Consequently, the small-cap mutual fund schemes could be indirect gainers from the new guidelines,” said Jean-Christophe Gougeon, director - investment solutions, Sharekhan by BNP Paribas.

Fund houses have time till February 2021 to realign their holdings as per the new circular. The regulator has said schemes should be complaint within one month of the industry body, Association of Mutual Funds in India, publishes the new list for large-, mid- and small-caps in January 2021. Sebi has said the changes are to ensure multicap funds are ‘true to lable’. “In order to diversify the underlying investments of multi-cap funds across the large-, mid- and small-cap companies and be true to label, it has been decided to partially modify the scheme characteristics of multi-cap fund,” Sebi said.

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