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 fundsare 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.

SEBI Circular - Multi-cap Mutual Funds Asset Allocation (NEW) Rules 2020 pic
SEBI Circular | Multi-cap Mutual Funds Asset Allocation (NEW) Rules 2020

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.

Kotak standard multi-cap equity fund | Asset Allocation (Pic source : Moneycontrol.com)

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!

Continue reading :

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

  • Neha says:

    Hello Sreekanth,
    Can you suggest few good MF’s having Foreign Equity Holdings.
    I am planning to invest Lumpsum amount (50K-1L) in Parag Parikh Long term equity fund for 3-5 yrs…plz share your opinion

    • Sreekanth Reddy says:

      Dear Neha,
      Do you hold any other MF Schemes?

      • Neha says:

        Yes,i am investing in below MF’s :-
        1. Kotak standard Multi Cap Fund
        2. ICICI blue chip
        3. HDFC top 100 fund

        • Sreekanth Reddy says:

          Dear Neha,
          PPLTE is a good fund. But, need to wait and see how they are going to re-align (if any) the scheme portfolio as per the latest SEBI’s norms.
          They have limited exposure to foreign equity.
          In case, you wish to have a fund with greater exposure then you can consider any fund of funds.. like ICICI Prudential US Bluechip Equity Fund or Kotak Global Emerging Market Fund Direct-Growth

          Also, the overlap % between HDFC Top 100 and ICICI Bluehcip fund is almost 60%, so its not really worth to hold two funds with a high overlap %.

          You may keep one large cap oriented fund.

  • Amit says:

    Hi Sreekanth,

    Can you suggest few good ETF and Gold ETF for long term horizon (5-10 years)

  • Roy says:

    Hello Sreekanth,

    Good evening!

    While we wait for the final outcome of the multicap restructuring ,would it be wise to sell off midcap fund (HDFC Midcap fund -last 6 yrs average yearly return @3%) in the portfolio till the party last and re enter the market again with same fund or another midcap fund .

    Best Regards ,
    Roy

    • Sreekanth Reddy says:

      Dear Roy,
      Unable to understand the logic here??

      • Roy says:

        Dear Sreekanth,

        Meant,that should I sell off Hdfc midcap at current levels and reinvest the lumpsum money at lower levels in midcap and other fund categories across my portfolio.

        Apart from the lumpsum will start a fresh sip in hdfc midcap or any other good midcap fund (Maybe a midcap passive fund or active fund)

        Your view on the above?

        Best regards,
        Roy

        • Sreekanth Reddy says:

          Dear Roy,
          If your investment time frame is long-term, you may continue with the holdings.
          How sure are you that mid-caps will correct in the near future?
          Timing the market is next to impossible.

  • Anchit says:

    I think Kotak will merge Multicap and bluechip fund to come out of multicap category. Lets see what they will do.

    • Sreekanth Reddy says:

      Dear Anchit,
      Yes, the fund houses have some options open to them.
      Also, they are approaching the regulator (SEBI) with their range of options and presenting their-side views on this ‘new norms’ to the regulator.. so let’s wait!

  • Ravi Dutt says:

    Multicap funds may find it difficult to invest 25 % in small caps. The order may also raise the demand for small caps. Wonder if it will be more profitable to invest in good small cap funds

    • Sreekanth Reddy says:

      Dear Ravi ji,
      Identifying good quality Small cap stocks is not going to be easy with all Fund managers.
      Addition of small cap stocks can increase volatility and the investors should be aware of this enhanced risk.

  • pranav risu says:

    Hi Sree,

    I have exposure in Parag Parikh LTE and Kotak standard Multi Cap Fund, What should i do now?? If Sebi is doing changes so frequently, its very difficult for normal man to re-balance portfolio. due to this changes multicap has 25% then now need to re-think about our investment in mid cap and small cap.

    Thanks a lot.

    Pranav Risu

    • Sreekanth Reddy says:

      Dear Pranav,
      Agree with your views!
      Suggest you to wait for sometime and see what the fund houses are going to do..

      Also, they are approaching the regulator (SEBI) with their range of options and presenting their-side views on this ‘new norms’ to the regulator.. so let’s wait!

  • Anubhav says:

    Hi Sreekanth,

    Thanks for the valuable information.
    – So lets say if Kotak standard Multicap will be changed to Focused from Multicap … so is there any limit defined by SEBI for number of stocks?

    Regards,
    Anubhav

    • pranav risu says:

      Hi Anubhav,

      As per I know, focus fund has maximum 30 number of stocks

    • Sreekanth Reddy says:

      Dear Anubhav,
      Focus Fund is an open ended equity scheme investing in maximum 30 stocks (has to mention where the scheme intends to focus, viz.,multi cap, large cap, mid cap, small cap)…

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