SEBI

Amendments in the Multi Cap Funds Sector

Multi cap Funds

Securities and Exchange Board of India (SEBI), regulator of capital market, on September 11, 2020, issued a circular and brought changes to Multi cap funds. In this article we will discuss multi cap scheme briefly and know the changes introduced in this scheme.

Definition of Large cap, Mid cap and Small cap Companies

SEBI defined Large cap, Mid cap and Small cap Companies, vide its circular issued on 6th October 2017, in order to ensure uniformity in respect of the investment universe for equity mutual fund schemes. Moreover, SEBI has stipulated that Association of Mutual Funds in India shall prepare the lists of stocks in this regard.

Large CapAs per SEBI, 1st to 100th company in terms of full market capitalisation 
Mid CapAs per SEBI, 101st to 250th company in terms of full market capitalisation
Small Cap As per SEBI, from 251st company in terms of full market capitalisation

Accordingly the Association of Mutual Funds in India, in consultation with Securities and Exchange Board of India and Stock exchanges, has prepared the list of stocks based on the data provided by the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock Exchange of India.

What are Multi cap Funds?

These are diversified mutual funds that can invest in the stocks across market capitalization. These funds resort to portfolio gyrations commensurate with the market condition.

These funds invests in companies with different market capitalization, fund manager average out the return from investing in various companies (large cap, mid cap and small cap) as per the returns. 

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Changes brought by SEBI in Multi Cap Funds

The changes that has been brought by the Securities and Exchange Board of India is in line with an earlier circular dated 6th October 2017 Categorization and Rationalization of Mutual Fund Scheme with an objective of true to label scheme that is the portfolio should reflect the scheme name and the name should correctly reflect the nature of the scheme.

Investment inLarge CapMid CapSmall CapTotal
Present    
EquityNo LimitNo LimitNo Limit65% Minimum
Proposed    
Equity25% Minimum25% Minimum25% Minimum75% Minimum

The table made above clearly states that after improvising changes in the multi cap scheme allocating 25% funds into each large cap, mid cap and small cap category would now correctly reflects the nature of scheme by diversifying funds across the sector in equal proportion.

The circular is issued by the SEBI as it gives exposure to mid cap/small cap stocks and their growth, larger portion of funds which earlier were allocated to large cap are now balanced equally among large cap, mid cap and small cap stocks.

The time limit provided to the fund houses to bring about the change in the present allocation to the new allocation of 25% each is up to January 31st 2021, in continuation of circular of September 11, SEBI issued one more circular on September 13 2020[1] which clarified that mutual funds have many options in order to meet the requirement depending on the unit holder preference apart from Re-balancing the portfolio that are as mentioned below:

  • May permit investor to switch to another scheme;
  • May merge multi cap scheme with large cap scheme;
  • Or may convert their multi cap scheme to another category (thematic, flexi cap etc.)
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All these options depend on the fund house and the fund manager of the scheme if he would re balance the portfolio accordingly or merge into another scheme category of the fund.

Example:

While quoting the example of one of the multi cap scheme that is Kotak Standard Multi Cap Funds having a largest AUM of 29,300 crore rupees in this category, the august 2020 end data of this scheme have an allocation of 74% in large cap, 21% in the mid cap, 1% in the small cap category shall have to change now which will result in selling 49% from large cap category and purchasing of 4% in mid cap stocks and 25% in small cap category.

Allocation of funds in mid cap/small cap companies earlier were not in large portion as it restricted liquidity, exit route in the small cap companies is tough, financial data and corporate governance standards available for the public might not be as reliable for fund manger to decide about the investment in such companies.

Conclusion


It can be concluded by stating that the investor should have patience. No change in the present scheme until fund house decides regarding the acceptance of the change in the required proportion or to merge to another scheme. The Securities and Exchange Board of India may also consider reviewing its circular after seeking into practical difficulty that fund house could face going into the new allocation.

Read our article:SEBI Investment Advisors Amendment Regulations 2020

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