Sebi tweaks multicap funds structure; experts say move to put buying pressure on smallcap counters

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Updated: Sep 11, 2020 11:30 PM

Further, such funds will have to make a minimum investment of 25 per cent each in equity and related instruments of largecap, midcap and smallcap companies, Sebi said in a circular.

At present, multicap funds need to invest 65 per cent of total assets in equity and its related securities.Industry experts estimate the move will see Rs 30,000-40,000 crore moving out of largecap to midcap and smallcap companies.

Markets regulator Sebi on Friday tweaked asset allocation framework for multicap mutual funds, requiring such funds to have a minimum corpus of 75 per cent invested in equities as against the present mandate of 65 per cent.

Further, such funds will have to make a minimum investment of 25 per cent each in equity and related instruments of largecap, midcap and smallcap companies, Sebi said in a circular.

Industry experts estimate the move will see Rs 30,000-40,000 crore moving out of largecap to midcap and smallcap companies.

All the existing multicap funds will ensure compliance with the provisions within one month from the date of publishing of the next list of stocks by industry body Amfi (Association of Mutual Funds in India), that is January 2021, the regulator noted.

“In order to diversify the underlying investments of multicap funds across the large, mid and smallcap companies and be true to label, it has been decided to partially modify the scheme characteristics of multicap fund,” the Securities and Exchange Board of India (Sebi) said.

At present, multicap funds need to invest 65 per cent of total assets in equity and its related securities.

Besides, there is no restriction on the exposure such funds need to make in large, mid and smallcap stocks, therefore, experts believe most of the multicap funds have higher allocation towards largecap, and residual exposure in mid and smallcap.

Majority of the multicap funds have run with a largecap bias and the new requirements will require them to reallocate significant portions from largecap stocks to smaller fare, Kaustubh Belapurkar, Director – Manager Research Morningstar India said.

“The new allocation requirements will need AMCs to reallocate Rs 40,700 cr from largecap stocks to midcaps (Rs 13,000 crore) and smallcaps (Rs 27,700 crore). This will put tremendous buying pressure on smallcap counters,” he added.

Jimeet Modi, founder and CEO, Samco Group said the new provision will lead to increased buying of up to Rs 30,000 crore in mid and smallcap stocks by multicap MFs.

This will be a disruption opposite to the one we saw in October 2018, when Sebi first introduced scheme categorisation. That had led to outflows from small and midcaps. The inverse will happen this time, he added.

Samco Group Head – RankMF Omkeshwar Singh said, “Now with this circular in effect, we will see most funds increasing their exposure in mid and smallcaps, while largecap already had lion’s share.”

The top 100 companies in terms of market capitalisation are considered as largecaps, the 101st to 250th companies are considered midcaps and 251st onwards are considered as smallcaps.

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