What is the present investment rule for multi cap category?
At present, the rule is to invest a minimum of 65% in equities, and then fund managers can invest across market capitalization (large, mid or small cap) as per their choice.
What is the new guide line issued by SEBI?
SEBI on Friday, issued a new guide line that modifies multi cap mutual fund category. A multi cap fund will be required to invest a minimum of 75% of its total assets in equities and the minimum allocation to large cap, mid cap and small cap will have to be at least 25% each.
What is the definition of large, mid, and small cap?
In order to ensure uniformity in respect of the investment universe for equity schemes, the definition of large cap, mid cap and small cap as follows:
- Large cap: 1st -100th company in terms of full market capitalization
- Mid cap: 101st -250th company in terms of full market capitalization
- Small cap: 251st company onwards in terms of full market capitalization
What is the deadline to comply with the latest rules?
SEBI has provided time till January 31, 2021 to mutual fund houses to comply with the latest rules.
What is the reason behind this move?
SEBI is of the view that the majority of the multi cap funds have high exposure to large cap stocks and are not investing enough in mid and small cap stocks. Thus, in order to diversify the underlying investments of multi cap funds across the large, mid and small cap companies and be true to label, SEBI decided to partially modify the scheme characteristics of multi-cap fund.
What is the existing allocation of the multi-cap funds to the three markets caps?
Below are the multi-cap funds which has an AUM of more than Rs. 1,000 Crores. The data is as on August 2020 and only shows its equity allocation.
| Fund Name | AUM (Rs. Cr.) | Largecap % | Midcap % | Smallcap % | Other % |
| Kotak Standard Multicap Fund | 29,714 | 72.30 | 21.34 | 1.13 | 2.34 |
| HDFC Equity Fund | 19,798 | 87.51 | 4.90 | 3.01 | 2.78 |
| Motilal Oswal Multicap 35 Fund | 11,240 | 82.59 | 10.07 | 4.66 | 1.07 |
| Aditya Birla Sun Life Equity Fund | 11,023 | 67.38 | 21.23 | 6.34 | 2.85 |
| UTI Equity Fund | 10,983 | 62.74 | 25.19 | 7.57 | 2.82 |
| SBI Magnum Multicap Fund | 9,063 | 73.89 | 12.41 | 10.83 | 0.93 |
| Franklin India Equity Fund | 8,591 | 80.83 | 9.38 | 5.94 | 0.42 |
| Nippon India Multi Cap Fund | 8,053 | 52.78 | 26.90 | 16.13 | 0.85 |
| Axis Multicap Fund | 6,434 | 89.40 | 6.25 | – | – |
| ICICI Prudential Multicap Fund | 5,594 | 73.74 | 12.98 | 8.55 | 2.04 |
| IDFC Multi Cap Fund | 4,847 | 52.77 | 24.38 | 15.28 | 5.78 |
| Parag Parikh Long Term Equity Fund | 4,508 | 37.76 | 8.90 | 18.60 | 28.59 |
| DSP Equity Fund | 3,726 | 62.00 | 28.75 | 6.83 | 1.06 |
| L&T Equity Fund | 2,366 | 70.38 | 16.99 | 9.40 | 0.89 |
| Canara Robeco Equity Diversified Fund | 2,280 | 67.83 | 18.59 | 6.27 | 2.11 |
| Tata Multicap Fund | 1,695 | 59.66 | 27.75 | 6.76 | 4.31 |
| Source: Ontrust Research |
What does the existing allocation indicate?
As of August, 2020, the assets under management of multi cap funds stood at Rs 1.46 trillion. Of the 35 multi-cap funds, 31 have over 50 per cent allocation to large-cap stocks, of this, 23 schemes have between 65 per cent and 92 per cent large-cap allocation. While there is still reasonable exposure to mid cap stocks (15-41 per cent in 19 multi-cap schemes), the exposure to small cap stocks remains low. The data shows that as many as 23 schemes have exposure of less than 10 per cent to small cap stocks.
Our calculation suggests that fund manager would have to sell roughly Rs. 37,000 crores, of which, roughly Rs 13,000 crore would move to mid-cap stocks and roughly Rs 24,000 crore would be deployed on small-caps.
What are the impacts the circular might have?
There might be a lot of questions arising – Will the large cap index witness a major correction due to outflow of money? Will this spark a rally in small-cap? And much more.
Let us assume that this rule is going to be implemented rigidly anyway. In this case, the negative aspects we can see are short term dip in large cap stocks. In the current global economic situation, AMCs might find it difficult to choose good quality mid caps and small caps at fair valuations which may lead to the rising of valuation of quality mid caps and small caps. There are funds with more than 25% exposure in international equity and with this rule coming in, they just have the room of 25% to play after the reserved 75% – this may hurt such funds.
If AMCs find it difficult to allocate money to good quality mid caps and small caps in the multi cap category, they might consider stopping fresh allotment/issuance of units under the scheme.
On the positive side, it will immensely help broaden the base of current MF holdings and give due recognition to a lot of deserving small and midcap companies. We can also see a short-term rally in small-cap stocks. And of course, funds will be MULTI cap in true sense.
Is there any alternative?
Yes of course. MF industry can approach the regulator with number of possible requests – to relook the changes arguing that the changes are not in the favour of unit holders, they may ask for extension of deadline, they may request creating a new category like flexi-cap where the asset allocation is completely fund manager’s discretion.
Apart from approaching the regulator, fund managers also have alternatives like applying for reclassification or merger of its multi cap fund with some other category (multi-cap with large & mid cap category).
What is Ontrust’s take on this?
We feel MF industry will not buy small and mid cap stocks immediately and also not sell large caps because of circular announcement. They will wait for their representation to SEBI.
There could be some short-term fluctuations but nothing worry-some in the long run – thus, panic buying/selling is not advisable. Mutual Funds is a goal based, long term and disciplined way of creating wealth. Stick to your goals and quality portfolio – and the ball will always be in your court.
Considering the worst-case scenario where no reconsideration or relaxation shall be provided, the new categorization rules will come into effect only in February 2021. The transition should be much smoother than is anticipated.