Compared to current allocations, AMCs need to collectively allocate about 18 per cent more or Rs 27,000 crore in small cap companies to realign the portfolios of existing Multi Cap Funds.
The forced pumping of money to meet regulatory compliance may be good for small cap companies, but would put investors' money in great risk.
The latest circular on the Multi Cap Funds issued by the Securities and Exchange Board of India (SEBI) on September 11, 2020 – asking the Asset Management Companies (AMCs) to allocate at least 25 per cent assets of such funds each to large cap, mid cap and small cap companies – has left the Mutual Fund (MF) players a confused lot.
This is because, the Multi Cap Funds are considered as relatively safer with the fund managers having flexibility of allocating the minimum mandatory 65 per cent equity allocation in the companies of large cap, mid cap and small cap space as per the market situations to minimise risks and optimise returns.
Now, the direction of minimum 25 per cent asset allocations each in large, mid and small cap companies will not only enhance the minimum allocation in equities and equity-related instruments to 75 per cent, but may also make the funds more risky with significant allocation in high-risk small cap companies.
Moreover, unlike investments in large cap companies, fund managers need to cherry pick small cap companies, not only after extensive study of books of accounts, but also need to take a call on future prospect of a company along with that of the sector/industry in which it belongs to.
Compared to current allocations, AMCs need to collectively allocate about 18 per cent more in small cap companies by January 21, 2021 to realign the portfolios of existing Multi Cap Funds.
The excess allocations would amounts to investments of approximately Rs 27,000 crore in small cap companies. Many experts believe that there may not be enough quality companies in the small cap space to invest this much money, resulting in investments in low quality stocks.
The forced pumping of money to meet regulatory compliance may be good for small cap companies, but would put investors’ money in great risk.
Arguing that the circular is not in favour of unit holders, many AMCs are looking for alternatives – like changing the scheme category from multicap to flexicap or creating a new category of funds – to avoid impact of the circular on performance of the existing funds.
To clarify its stand, the market regulator issued a press release, saying that AMCs have many options to meet with the requirements of the circular.
Pointing out that some Multi Cap Schemes have skewed portfolios, with over 80 per cent 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 said that the portfolio of a fund should reflect the name of the scheme and the name of the scheme should correctly reflect the nature of the portfolio.
“Apart from rebalancing their portfolio in the Multi Cap schemes, they could inter-alia facilitate 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 cum Mid Cap scheme,” SEBI said in its circular.
So, the market regulator has provided exit options to investors and AMCs, who don’t want to assume the additional risk through portfolio rebalancing of the Multi Cap Funds.
“This Clarification by SEBI is a welcome move as the fund managers are sceptical of investment calls in small cap due to their inability to weather the present economic turbulence and staying invested in bellwether stocks would be a safe bet. Further, many of the investors, not favouring risk, may have switched to other funds or withdrawn their money. SEBI’s clarification offering flexibility to the unitholders to switch and the MFs to merge or convert the schemes will allow the MF to retain the investors, not in favour of exposure of aggressive/ risky portfolio,” said S Ravi, Former Chairman of Bombay Stock Exchange (BSE) and Managing Partner of Ravi Rajan & Co.