SEBI asks AMCs to restructure Multi-Cap Funds: What would be its impact on risk, return?

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Updated: Sep 11, 2020 9:35 PM

As per the new guideline, the minimum asset allocation in equity and equity related instruments of a Multi Cap Fund must be 75 per cent or more.

mutual fund, MF, equity-oriented fund, Multi Cap Fund, asset allocation, SEBI, minimum asset allocation, equity and equity related instruments, risk and return of Multi Cap FundsThe minimum asset allocations of Multi Cap Funds in large, mid and small cap companies will be 25 per cent each.

Market regulator Securities and Exchange Board of India (SEBI) has issued new guidelines regarding categorisation and rationalisation of Mutual Fund (MF) Schemes under the Multi Cap Category and has asked the Asset Management Companies (AMCs) to comply with the order within one month from the date of publishing the next list of stocks by the Association of Mutual Funds in India (AMFI), i.e. January 2021.

As per the SEBI guideline, to diversify the underlying investments of Multi Cap Funds across the large, mid and small cap companies and be true to label, the scheme characteristics of Multi Cap Funds need to be partially modified.

Accordingly, minimum 75 per cent asset allocation of such funds must be in equity and equity related instruments with minimum 25 per cent in large cap companies, at least 25 per cent in mid-cap companies and not less than 25 per cent of the allocation should be in small-cap companies.

The point to be noted is that, to be recognised as an equity-oriented fund, the minimum asset allocation in equity and equity related instruments of a fund must be 65 per cent or more.

However, as per the new guideline, the minimum asset allocation in equity and equity related instruments of a Multi Cap Fund must be 75 per cent or more.

At present, the asset allocation of most of the Multi Cap Funds in equity and equity related instruments of small-cap companies are in single digit.

For example, small-cap allocation of Kotak Standard Multicap Fund is just 1.04 per cent, that of HDFC Equity Fund is 3.43 per cent, allocation of Axis Multicap Fund is nil in small cap, that of ABSL Equity Fund is 5.24 per cent and small-cap allocation of SBI Magnum MultiCap Fund is 6.35 per cent.

Some of the MF industry stakeholders believe that the new allocations would increase the risk in Multicap funds since most of them hardly have any exposure to high-risk small cap companies right now.

However, the decision would brighten the return prospects also and would also help the small cap companies which have been struggling.

Ajay Sharma, Director & Designated Partner, InvestmentMitra Advisors LLP, believes that it will restrict fund managers’ decision making powers, which, on the other hand, may impact performance of the Multi Cap Funds.

“This move is like clipping the wings of fund managers and will affect their performance for Multi Cap Funds. If a fund manager feels that markets are volatile and schemes should have more investments in large cap and no exposure to small cap, he will not be able to. He has to mandatorily invest 25 per cent into small caps. That will adversely impact the performance of the scheme,” said Sharma.

“In short term, it may spike rally into small-cap companies as a good number of Multi Cap Funds are more into large and midcap stocks,” he added.

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