Announcements

SEBI Changes Multi-Cap Fund Exposure Norms

September 12, 2020

SEBI Changes Multi-Cap Fund Exposure Norms

In a move “to diversify the underlying investments of Multi-Cap Funds across the large, mid and small-cap companies and be true to label” Securities Exchange Board of India, in its recent circular, has directed fund houses to deploy 75% of its total Multi-Cap fund corpus across Mid-Cap, Small-Cap, and Large-Cap stocks i.e 25% for each of this category.

SEBI has directed fund houses to align their existing portfolio within one month from the date of publication of the next list of stocks by AMFI (Association of Mutua Funds in India) i.e by Feb 1, 2021.

AMFI publishes a list of Large-Cap, Mid-Cap and Small-Cap stocks every six months. After the release of this list, fund houses have a month’s time to rebalance their portfolio. AMFI will be publishing its next list in January 2021.

The total AUM of Multi-Cap schemes in India is estimated to be around Rs.1,460 billion and reports suggest that within that, 65% of the corpus is invested in Large Cap stocks, nearly 18% is in Mid-Cap space, and 9% in Small-Cap and the remaining is in cash.

Once the Multi-Cap funds comply with SEBI’s regulation, the larger positive impact is to be seen on Small-Caps. Given the low liquidity in Small-Cap space, an incremental inflow of more than Rs. 200 bln would have a strong impact on Small-Cap stocks.

On Sunday, SEBI clarified that the mutual fund houses can avail of various options to comply with new rules of deploying 75% to each type of market capitalization.

“Apart from rebalancing their portfolio in the multi-cap schemes, they could inter-alia facilitate a switch to other schemes by unitholders, merge their multi-cap scheme with their large-cap scheme or convert their multi-cap scheme to another scheme category, for instance, large and mid-cap scheme,” the market regulator said in a press release released on Sunday.

“However, it has recently been observed that some multi-cap schemes have skewed portfolios, with over 80% of investment in large-cap stocks akin to large-cap schemes, and some multi-cap schemes have near-zero or insignificant asset allocation to small-cap companies.”

SEBI reiterated that these steps were necessary to achieve the objectives of true to label and appropriate benchmark and take necessary steps to clearly distinguish multi-cap schemes from other categories of schemes.

Conclusion

SEBI’s new norm of allocating 25% of the corpus of Multicap funds to Large-Cap, Mid-Cap and Small-Cap each will increase an inflow in the Small Cap category.