The Securities and Exchange Board of India on Friday announced a detailed structure for multi-cap funds. The new regulations call for at least 25 per cent of the portfolio to be invested in large caps, mid-caps and small caps each.
“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,” the market regulator said.
As the name suggests, multi-cap funds invest across a basket of large, mid and small-cap stocks. However, until now, there was no mandatory percentage allocation for each category.
Total assets under management of multi-cap funds are around Rs 1.46 lakh crore and available data shows that majority of the multi-cap funds were biased towards large caps, with some funds having as much as 80 per cent to 90 per cent of their investments in large caps. Among the 16 multi-cap funds, on average 66.6 per cent of the funds were invested in large caps, 17.3 per cent in mid-caps and 9.1 per cent only in small caps.
All the existing multi-cap funds will have to comply with the new provisions within one month from the date of publishing the next list of large, mid and small-cap stocks by the Association of Mutual Funds of India, i.e.January 2021, SEBI said.
So, mutual funds have a few months time to comply with the new circular, but clearly, it will have huge ramifications on the asset management industry and multi-cap funds in particular as fund managers will have to rejig their portfolios significantly in such funds.
“It constrains the ability of mutual funds in a category that boasted of its go-anywhere flexibility,” said Kaustubh Belapurkar, director–manager research at Morningstar India.
The new allocation requirements will need AMCs to reallocate Rs 40,700 crore from large-cap stocks to mid-caps (Rs 13,000 crore) and small caps (Rs 27,700 crore), Belapurkar noted.
“One could expect large selling in large-cap counters, while small and mid-cap stocks would surely gain due to this change, which starts from January 21 onwards,” said Avinash Gorakshakar, director research at ProfitMart Securities.
Joseph Thomas, head of research at Emkay Wealth Management also said the move will help mid-cap and small-cap stocks move up in the wake of their share going up in terms of their allocation.
Small-cap and mid-cap stocks have underperformed the broader markets for the last couple of years. Amid the overall economic slowdown, which had set in even before COVID19 pandemic hit, whether there will be enough quality small-cap stocks for the funds' houses to pick up, will be a big question.
For investors too, these changes will have an impact on their asset allocation. Essentially, investors will have to now assess their exposure to the various funds and categories, to ensure their investment basket is truly diversified and not skewed towards either large, mid or small-cap stocks.
“If an investor already has significant exposure to mid-cap and small-cap funds, having a multi-cap fund may not be a good fit any more,” said Belapurkar.