Multi-cap Mutual Funds Asset Allocation (NEW) Rules | SEBI’s New Norms

The Mutual funds are broadly classified as Equity based and Debt oriented mutual fund schemes. Equity funds are further classified into different categories like Large-cap, Mid-cap, Small-cap, Multi-cap, ELSS (Tax saving), Balanced funds etc.,

A Large-cap oriented mutual fund scheme primarily invests (minimum) 85% of its total assets in large-cap company shares.

Similarly, as per the existing rules, a Multi-cap Mutual fund scheme or Diversified Equity Scheme can invest a minimum of 65% of total assets across large, mid and small cap stocks. At present, fund managers of multi cap funds can invest across market capitalization as per their choice.

However, SEBI, in a recent circular, has tweaked the Asset allocation rules for multi cap mutual funds.

Multi-cap Mutual Funds Asset Allocation (NEW) Rules

Below is the latest circular issued by the SEBI regarding new norms on asset allocation rules for multi-cap funds. These rules will be effective from the end of January, 2021.

As per the new norms by SEBI, the asset allocation rules for multi-cap funds are modified as below;

• Minimum allowed investment in equity & equity related instruments will be changed to 75% of total assets. At present, the rule is to invest a minimum of 65% in equities.
  • Minimum investment of 75% in equity and equity related instruments has to be done in the following manner:
    • Minimum investment in equity & equity related instruments of large cap companies —> 25% of total assets
    • Minimum investment in equity & equity related instruments of mid cap companies —-> 25% of total assets
    • Minimum investment in equity & equity related instruments of small cap companies —-> 25% of total assets

At present, fund managers of multi cap funds can invest across market capitalization (large/mid/small cap) as per their choice.

For example, Kotak Standard Multi-cap Fund currently (as on 30-Aug-2020) has 97.48% investment in Indian stocks of which 66.47% is in large cap stocks, 22.5% is in mid cap stocks, 1.53% in small cap stocks. Fund has 0.01% investment in Debt securities.

You can notice that though the above fund is a multi-cap fund, most of its assets are primarily invested in Large-cap stocks (66%). Going forward, the new norms will take away this flexibility. It will also force fund managers to stay invested irrespective of the performance of the stocks in a certain market capitalization – i.e., at least 25% each in large-, mid-, small-cap stocks.

What should existing Multi-cap investors do now?

According to Value Research, the multi cap fund category has currently an average exposure of around 70% of the portfolio in giant & large cap stocks, 22.42% in mid cap stocks, and 8.34% in small cap stocks.

• So, most of multi-cap schemes are invested mostly in giant and large cap stocks. Most schemes have very less exposure to mid-cap and especially small cap stocks.
• To meet the SEBI’s new norms most multi-cap based funds will require shuffling of their portfolios by their fund managers.
  • Most multi cap schemes will have to increase their exposure to small cap stocks drastically. Some schemes also need to add more mid cap stocks to their portfolios.
• This re-alignment can enhance risk (volatility) if the scheme is currently managed with a very large diversified portfolio. So, advisable to check your multi-cap fund’s current portfolio allocation.
• Another scenario can be, a multi-cap scheme may change fundamental investment objective, from generic multi-cap fund to say Focused fund (where these new norms are not applicable). In this case, your fund may be shifting from a well-diversified portfolio to a concentrated portfolio.
• So, in both the scenarios, the existing investors of multi-cap schemes will feel the impact.

Kindly observe how your multi-cap scheme is going to tackle this issue. I believe the existing investors should wait till January 2021 and then take decision.

If you are uncomfortable with the exposure to small cap stocks (25%), you may consider investing in large & mid cap schemes instead of multi-cap funds.

What is your view on these ‘Multi-cap Mutual Funds Asset Allocation (NEW) Rules’? Do share your comments, cheers!

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(Post first published on : 12-Sep-2020)