SEBI Changes Allocations Within Multi-Cap Schemes
The logo of Securities and Exchange Board of India (SEBI) is pictured on the door handle of a corference room at the market regulator hearquarters in Mumbai, India. (Photo: BloombergQuint)

SEBI Changes Allocations Within Multi-Cap Schemes

The market regulator changed the minimum allocations in multi-cap funds to diversify investments, a move that’s expected to drive flows from large caps to small and medium caps.

The multi-cap schemes are now required to equally divide 75% of their total assets between large, small and mid caps, according a circular by Securities and Exchange Board of India on Friday. What that means is that multi-cap plans will have to invest at least 25% of the assets each in equity and equity-related instruments of large-, mid- and small-cap stocks.

According to the existing categorisation, a multi-cap fund is an open-ended equity scheme investing across large cap, mid cap, small cap stocks. These schemes were required to invest at least 65% of their total assets in equity and equity-related instruments.

The regulator attributed the change in allocation to “diversify the underlying investments of multi cap funds” across the three categories to remain “true to their label”. All existing multi-cap schemes shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by Association of Mutual Funds in India—or January. So these schemes will have to reshuffle their portfolios by February.

This will require many multi-cap funds to reallocate a significant portion of their holdings towards mid and small caps, according to Kaustubh Belapurkar, director, fund research, Morningstar Investment Adviser India. Many multi-cap funds are currently run with Large cap bias, he told BloombergQuint, adding that the move reduces the degree of freedom a fund manager has in managing the portfolio allocations.

Belapurkar estimates about Rs 40,700 crore will need to move from large caps to mid and small caps—about Rs 13,000 crore to mid-cap stocks and about Rs 27,000 crore to small caps.

Also read: SEBI’s Multi-Cap Fund Rule Will Push $5 Billion To Mid And Small Caps

Pratik Oswal, head of passive funds at Motilal Oswal Asset Management Company, agreed. “It reduces the flexibility to play different caps and their cycles and valuations,” he said. “Also puts pressure to small cap liquidity which is already quite low. A Nifty 500 index fund is basically a large-cap fund now."

Gurmeet Chaddah, co-founder of Complete Circle Consultants, expressed concern over potential volatility in large multi-cap funds. Large multi-cap funds will now have very large exposures to small caps, which are volatile, he said, adding that this will cause extreme volatility in net asset value of these funds.

Fund managers, however, said since they have time till February, reallocation will happen in phases. So the new norms may not mean a sudden gush of money into small caps, the least represented category in multi-cap schemes.

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