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SEBI’s Multi-Cap Fund Rule: Won’t Buy Small, Mid Caps If It Doesn’t Make Sense, Says Nilesh Shah

SEBI’s direction to diversify investments in multi-cap funds would not have a “material change” in the investment process.

The logo of Securities of Exchange Board of India (SEBI) is pictured on its headquarters in Bandra Kurla Complex in Mumbai, India. (Source: BloombergQuint)
The logo of Securities of Exchange Board of India (SEBI) is pictured on its headquarters in Bandra Kurla Complex in Mumbai, India. (Source: BloombergQuint)

The market regulator’s recent move directing fund managers to diversify investments in the multi-cap funds would not have a “material change” in the investment process, according to Nilesh Shah, head of the asset manager with the largest such scheme.

“Kotak Mutual Fund works with singular focus of doing what is right for unit holders and complying with letter and spirit of regulations," Shah, group president and managing director at Kotak Mahindra Asset Management Company, said in an investor call, according to details shared by the fund house. "We will not buy small and mid cap stocks if it doesn't make sense for our unitholders, contrary to what is being speculated on street.”

Shah outlined some of the options:

  • Return money to clients.
  • Switching to other equity funds.
  • Merge multi-cap fund with large cap funds or large and mid-cap funds to maintain the same investment process and portfolio quality.
  • Convert the multi-cap fund to a thematic fund like ESG (environmental, social and governance) fund to maintain investment process as well as portfolio quality.

The Securities and Exchange Board of India changed rules mandating that multi-cap fund should invest at least 25% of total assets in each of large, mid and small caps stocks. While earlier such schemes had to invest 65% assets in equities, there were no category-wise allocation thresholds. The change is expected to cause and outflow from large caps, and an estimated inflow of about $5 billion into small caps.

Shah told investors that Kotak AMC will request SEBI to consider creating a ‘flexi-cap’ category within or outstide the multi-cap universe to ensure minimum portfolio disturbance happens while complying with the new rule.

“Currently in a balance fund, it is possible to manage conservative or aggressive hybrid funds," he said. "In the same way in the multi-cap category, it is possible to manage multi-cap (with minimum allocation as per new circular to large-cap , mid-cap and small-cap stocks) and flexi multi-cap (with flexible allocation to large-cap, mid-cap and small-cap stocks).”

For its multi-cap fund, the fund house invests in large-cap stocks based on a risk-reward point of view which requires an understanding on impact cost, balance-sheet quality and governance practices, he said.

“Kotak Standard Multi-Cap Fund is the largest multi cap fund in India. It has built a tremendous track record of performance by following a disciplined investment process," Shah said. "We will explore all options to ensure that it's time tested and successful investment process is carried forward with minimum disturbance."