SEBI Issues New Guidelines to Ensure That Multi Cap Funds Stay True to its Name

Sep 14, 2020

Listen to SEBI Issues New Guidelines to Ensure That Multi Cap Funds Stay True to its Name

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In the absence of any restriction on market cap allocation, most Multi-Cap funds hold a large cap biased portfolio with a significant allocation to mid and small caps. Some fund managers carry negligible allocation to lower market caps or completely ignore the small cap segment, thus failing to meet the multi-cap mandate. In other words...

Most multi cap funds effectively function as a large cap fund.

This goes against the SEBI's objective of its 2017 circular on scheme categorization, which sought to achieve the following:

1) True to Label schemes - The portfolio should reflect the name of the scheme and the name of the scheme should correctly reflect the nature of the portfolio.

2) Comparison with an appropriate benchmark - The scheme performance should be disclosed to the investors vis-a-vis an appropriate benchmark.

For example, large cap schemes should have S&P BSE Sensex or Nifty 50 as a benchmark and at least 80% of the portfolio should be invested in large cap stocks.

To ensure that multi cap funds hold a diversified portfolio across large, mid and small cap companies, be true to its label, and to distinguish it clearly from other scheme categories, SEBI has partially modified the characteristics of multi cap fund.

Table 1: Market cap allocation of top 5 multi cap funds in terms of corpus

Scheme Name Allocation (%)
Large Cap Mid Cap Small Cap Others
Kotak Standard Multicap Fund 77.67 18.25 1.18 2.89
HDFC Equity Fund 85.88 8.39 3.93 1.80
Motilal Oswal Multicap 35 Fund 88.90 4.83 4.66 1.61
Aditya Birla SL Equity Fund 68.17 23.85 5.78 2.20
UTI Equity Fund 65.78 27.07 5.46 1.69
Data as of August 31, 2020
(Source: ACE MF; PersonalFN Research)

Multi-Cap funds will now have to invest at least 75% of its total assets in equities, with at least 25% exposure each in large cap, mid cap and small cap stocks. Currently, mutual funds are mandated to invest minimum 65% of its assets in equity and equity-related instruments with no limit on market cap allocation.

SEBI has asked all multi cap funds to comply with the new provision within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021.

(Image source: photo created by mindandi -

Impact on multi cap fund portfolios

As of August 31, 2020, multicap funds had a total AUM of around Rs 1,46,663 crore, of which around 74% is invested in large caps, 16.4% in mid caps, and just 6% in small caps. Around 3.6% of the asset is in cash, debt, and others.

Notably, with a total AUM of around Rs 1,46,663 crores (as of August 2020), multi-cap funds is the second largest category in the equity fund segment.

Post rebalancing of the portfolio to comply with the new guidelines, large cap allocation in multi cap funds would come down to 50% or less from the current ~75%. Meanwhile, a significant portion of the corpus (around Rs 40,500 crore) is expected to shift towards mid and small caps over the next 3 to 5 months.

Some multi cap funds having large AUM of around Rs 20,000 crore to Rs 30,000 crore will have to invest around Rs 5,000 crore to Rs 7,500 crore in mid caps, and a similar amount in small caps as well, which is a fairly illiquid segment.

Moreover, mid and small caps being highly risky in nature, the risk element in the portfolio of multi cap funds is expected to increase, thus making them more volatile.

Table 2: Expected shift in corpus allocation of Multi Cap Funds

(Rs in Crore) Large Cap Mid Cap Small Cap Others
Current Allocation 1,08,502 24,091 8,742 5,327
New Allocation 68,443 36,666 36,666 4,888
Difference -40,058 +12,574 +27,923 -439
AUM as of August 31, 2020
(Source: ACE MF; PersonalFN Research)

Challenges the fund managers may face and the way out

If multi cap funds decide to rebalance the portfolio as per new norms, the windfall inflow in many mid and small cap stocks could set a rally in these stocks and lead to the much awaited broad-based market rally. Therefore, mid cap funds and small cap funds could become the indirect beneficiaries of SEBI's new norm. However, it remains to be seen if the rally will be sustainable.

Indian economy is going through a prolonged slowdown and therefore the growth prospects of mid and small-sized companies are at present very gloomy. Besides, many companies in smaller caps are marred with corporate governance issues and concerns regarding business stability. Therefore, picking valuable investment opportunities would be a challenging task for the multi cap fund managers.

Due to lack of investment opportunities and liquidity constraints in smaller caps, many multi cap funds may not prefer to continue with the existing mandate. Multi-cap funds might consider merging schemes with another scheme or rebrand itself to another category to avoid reshuffling its portfolio.

SEBI too has clarified that apart from rebalancing their portfolio; multi-cap funds can merge their scheme with their large-cap scheme or convert their multi-cap scheme to another scheme category, for instance large & mid cap fund, thematic fund, value/contra fund, etc.

In order to ensure market stability, SEBI has given time to mutual fund houses till January 31, 2020, to comply with the circular through its preferred route.

Further, SEBI will examine proposals of the industry, if any, received in this regard and make changes if necessary.

What should investors do?

Investors need to reconsider their risk appetite with respect to their exposure in multi-cap funds. With reduced allocation in large caps, multi-cap funds won't be able to offer the kind of stability they offered in the past.

If you are uncomfortable with the higher risk element or if you already have sufficient exposure to mid and small cap segment based on your personalized asset allocation plan, it would be better to shift your investment to another low-risk scheme/category.

In case your multi-cap fund decides to rebrand itself as new category or merges with another scheme such as large-cap scheme, it may or may not have a significant impact on the portfolio. Some changes in attributes may not match your initial investment objective and expectations that you had while investing in the scheme.

If your scheme is merged or there is a category change, you may need to relook at your investment strategy and figure out whether the new scheme fits into your investment objective. If the new style deviates much from your objective and your risk appetite, then it will be prudent to move out of the scheme.

Keep a close watch on the portfolio movement and changes in fundamental attributes of your multi-cap schemes over the next few months. Remember to consult your financial advisor before making any changes to your mutual fund portfolio so that you make an informed decision.


Warm Regards,
Divya Grover
Research Analyst


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