New Regulations For Multi Cap Funds By SEBI


Friday, the 11th came with some unexpected news from the Security and Exchange Board of India (SEBI). SEBI has modified the rules for Multi Cap Funds asset allocation. This sudden change in the norms was welcomed by some while many others found themselves skeptical of the to-be change in scenario,

What are the New Regulations For Multi Cap Funds?

On Friday, SEBI announced changes in the structure of allocation of Multi Cap Funds. While earlier the mandate dictated that the minimum investment in equity and equity-related instruments be at least 65% of total assets, on 11th September 2020, SEBI has mandated a minimum of 75% investment in equities and related instruments.

Also, SEBI has specified that multi-cap funds will now invest a minimum of 25% each in Large Cap, Mid Cap and Small Cap companies. Earlier there were no guidelines on how the funds were allocated across market segments.

Reason for the New Regulations For Multi Cap Funds

SEBI has made its position clear on the whole matter by saying, “In order to diversify the underlying investments of multi-cap funds across the large, mid and smallcap companies and be true to label, it has been decided to partially modify the scheme characteristics of multi-cap funds.”

Mutual fund houses have been assuming too much freedom in managing the asset allocation in multi-cap funds. This has recently resulted in a distorted division with a bias towards specific market segments. While there is nothing very wrong with being flexible, it also does not entirely reflect true-to-label management and could lead to distorted perceptions for new investors.

Over the recent times, most multi cap funds have heavily allocated their assets to large cap funds, while small and mid cap funds remain under their shadow. This move by SEBI has been made to bring more parity to all market cap segments.

Impact on Fund Houses with New Regulations For Multi Cap Funds

Fund houses have been offered time till January 31, 2021 to re-balance portfolios in compliance with the latest guidelines. As per Sunil Subramaniam, Managing Director and CEO of Sundaram Asset Management Company, “The change in rule will lead to Rs 10,000 crore worth of additional flows into small caps and Rs 5,000 crore into mid caps.”

On Sunday, SEBI issued another circular to make clarifications regarding their Friday circular. As per SEBI, ” Apart from rebalancing the portfolio, mutual fund houses can facilitate switching to other schemes by the unit holders or, merge their multi cap scheme with their large cap scheme or convert their multi cap scheme to another scheme category for an instance, large cum mid cap scheme.” 

If you think about what the category looks like right now, then we can tell you that there are 35 active multi cap schemes running with an AUM of Rs 1.46 lakh crores. Out of these 35 schemes, only 4 have an allocation of less than 50 per cent towards large-cap stocks which proves how the category is heavily skewed towards large-cap stocks. 

Further, out of the total money only Rs 8,700 crore or 6% is parked in small cap stocks and Rs 24,000 crore or approximately 16% is in mid-cap stocks. Since the goal in mind is to optimise the portfolio quality, all mutual fund houses have 3 options now:

1. Re-balance Existing Portfolios: This is the most easy yet the most tricky option since it might not be possible for all fund houses. Some multi cap funds might have an allocation near to the prescribed allocation, so they will choose to re-balance the existing portfolio while keeping in mind the impact on the fund’s performance.  

2. Re-categorize Schemes: The most probable step that fund houses might take is to re-categorize their market segment from multi cap to large cap or from multi cap to large and mid cap, keeping in mind their current market allocation. Hopefully, this will cause minimum impact on the fund performance.

3. Merging Schemes:  Another option open for fund houses is merging their multi cap funds with another strong portfolio. This way they will be able to retain the performance and portfolio quality while complying with the guidelines.

How will Investors be impacted?

As an investor the best thing to do right now is NOTHING. While the tide seems high right now, please remember that the markets can carry on alright after small waves like these crash onto their shores. Don’t give in to the urge of timing the market. What you need to make sure of is that your asset allocation and fund selection is based on your goals.

Rajeev Thakkar, Chief Investment Officer of, PPFAS Mutual Fund, and the fund manager of the best performing multicap Fund – Parag Parikh Long Term Equity Fund asked investors to keep their cool. He went on twitter to say, “All will be fine, no knee jerk reactions please.”

Though if you are really skeptical about the current situation’s impact on your folio, then you can review your portfolio majorly from asset allocation and product suitability point of view. You must thoroughly consider the experience and credibility of the fund manager and AMC. 

Since the earlier rules allowed managers to play up their strengths in terms of market segments, the new guidelines require expertise across market segments. However this is relevant only if the fund chooses to rebalance its portfolio for alignment. Funds choosing to rebalance will realign the portfolios over the next five months, gradually. Hopefully, the impact will be minimal, especially for long term investors.


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