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

The new SEBI guideline for multi-cap funds will prompt five months of churn for several mutual funds as well as the equity markets. Experts estimate it will cause Rs 35,000-40,000 crore to move out of large caps into mid- and small-cap companies.

On Thursday, a circular by the Securities and Exchange Board of India made two changes to allocations by multi-cap mutual funds;

  • 75% of total assets of multi-cap funds will now have to be invested in equity and equity-related instruments versus the earlier threshold of 65%.
  • This 75% must be equally split over large-, mid- and small-cap companies.

Mutual funds have up to February 2021 to meet these new allocation norms.

Fund house executives and experts told BloombergQuint most multi-cap funds are heavily skewed towards large-cap companies and this new SEBI rule will prompt a rebalancing of portfolios and a gush of investments towards mid- and small-cap companies.

Rajeev Thakkar, CIO, PPFAS Mutual Fund

In any multi-cap strategy most portfolios would have larger tilts toward the bigger companies. That is the nature of the market. About 77% of the market is in large-caps. Another 13% in mid-caps and small-caps only about 10 %.

If portfolios are to have large-, mid-and small-caps in more or less equal proportions, the Nifty 500 and BSE may not be very representative. Also the risk profile of such portfolios will be very different from the current one.

Joseph Thomas, Head of Research, Emkay Wealth Management

At present, the multi-cap funds have almost 70% of their allocation to large-cap stocks and the balance to mid-cap and small-cap stocks. The new regulation will make it mandatory that any market cap may have a minimum allocation of 25%, and therefore, to the extent of the excess allocation to large-caps mutual funds will have to reduce the allocation, that is, 20%, and move into mid-caps and small caps. An amount equivalent to Rs 35,000 crore will move out of large caps and will move into mid and small caps.

Jean-Christophe Gougeon, Director-Investment Solutions, Sharekhan by BNP Paribas

Currently, the multi-cap category of mutual fund scheme have assets under management of around Rs 1.4 trillion (Rs 1.4 lakh crore) roughly and majority of the schemes have very low exposure to small-cap companies. This essentially means that most asset management companies will have to undertake major rebalancing of their portfolios to adhere to new regulations by January 2021.

The fallout of the rebalancing by AMCs would be visible in equity markets with CNX Smallcap index likely to sharply outperform with buying interest from domestic institutions in the coming months. Consequently, the small-cap mutual fund schemes could be indirect gainers from the new guidelines by the regulator.

Kaustubh Belapurkar, Director- Fund Research, Morningstar

SEBI’s modification in multi-cap funds’ characteristics reduces the degrees of freedom a fund manager has in managing the portfolio allocations. This will require many multi-cap funds to reallocate a significant portion of their holdings towards mid and small caps, especially since present ones majorly run with large cap bias. Approximately Rs 40,700 crore will need to move from large-caps to mid- and small- caps. Of the total, approximately Rs 13,000 crore will move to mid cap stocks and about Rs 27,000 crore will move to small caps stocks.

JM Financial Research Note

Based on our analysis of the existing asset allocation of multi-cap schemes (total AUM of Rs 1.4 trillion), 74.2% of the total asset were invested in large-cap companies and only 15.8% and 5.3% were invested in mid-cap and small-cap companies as of Jul-20. Multi-cap schemes have time till Jan. 21 to comply with these revised asset allocation guidelines.

In our view, multi-cap schemes have 2 options:

a) rebalance existing portfolio which could lead to potential inflows of Rs 131 billion and Rs 280 billion in mid-cap and small-cap companies and

b) merge existing multi-cap schemes with existing large cap/focussed funds and launch a new multi-cap scheme.

For a full list of multi-cap schemes and their exposure large-, mid- and small cap companies click here.

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