SEBI’s revised circular on multicap funds

Last updated: 15 Sep, 2020 | 11:19 am

SEBI’s revised circular on multicap funds
  • SEBI has issued a new clarification on its latest rule on multi cap funds. The regulator has now said that mutual funds are free to choose the route for complying with the revised norms on multi-cap funds. 
  • On Friday, the capital markets regulator had directed multi-cap funds to invest at least 25% of their corpuses each in large-cap stocks, mid-caps and small-cap stocks
  • For example, if a multi-cap scheme of a fund house has an AUM of Rs 10,000 crore, it will have to invest at least Rs 2,500 crore each in the three categories of stocks. The fund manager is free to invest the remaining Rs 2,500 crore in any category they want.

What are the different routes that mutual fund houses can take to comply with the regulation?

Apart from rebalancing their portfolio in the multi-cap schemes to comply with rules, mutual funds could:

  • facilitate switch to other schemes by unit holders
  • Merge their multi-cap schemes with large-cap schemes
  • Convert their multi-cap schemes to another scheme category, for instance, large cum mid-cap schemes

The table below shows mutlicap schemes which already have a large and midcap scheme, and hence, could take the route to merge their multicap schemes.

INDmoney Analysis

  • Currently, the total AUM of multicap funds stands at ₹1.46 lakh crore, out of which about 72% is invested in large-cap stocks. The exposure into mid-cap stocks is around 16.4%.  So, in order to meet the minimum 25% allocation to midcaps, mutual fund houses will have to move an aggregate investment of Rs 12,600 crore and about ₹27,000 crore into smallcap stocks to comply with the regulation. 
  • “In 27 out of the 35 multi-cap schemes, large-cap stocks account for over 60% of the scheme’s holdings and in case of 18 schemes, large-cap companies account for more than 70% of the scheme’s investments.” The table below shows which how much top mutlicap funds have in large-cap funds. 
  • “For these large funds (which have AUM of more than ₹1,000 crore) complying with the regulation is even harder, as smallcap stocks do not have the capacity to absorb such a large inflow given their low market capitalisations.” Among the NSE 500, smallcaps make up just 6% of the total market capitalization. Hence, fund managers will have to look beyond the top 500 stocks to comply with the new rule.
  • Funds with less than ₹1,000 crore will find it easier to comply with the regulation, as they will need to buy just ₹250 crore worth of smallcap stocks to comply with SEBI. 

What should you do?

Existing investors

  • For investors, Equity allocation amongst large, mid and small-cap segments should be based on the risk profile, investment horizon and liquidity needs. In case you have a long-term time horizon, it is advisable to wait for more clarity, as mutual fund houses will communicate what they plan to do with the multi-cap fund.
  • In case you are uncertain about your time horizon and are sitting on gains in these funds, we recommend that you redeem the funds and re-allocate the amount to large-cap. Midcap and small-cap funds separately. Contact your wealth advisor to assist you with the same

Investors looking to deploy fresh capital

  • We advise you to invest in large-cap, midcap and small-cap funds separately rather than choosing multi-cap funds. Contact your wealth advisor to assist you with the same. We recommend stopping your SIP’s in multi-cap funds.

Please find your exposure to multicap funds. (listed below)

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