SEBI Introduces Minimum Market Cap Allocation Norms For Multi-Cap Funds
   Sep 12, 2020

The market regulator SEBI (Securities and Exchange Board of India) has introduced minimum market cap allocation norms for multi-cap funds.

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.

In a circular issued by SEBI, it has asked mutual fund houses 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, in absence of any limit on market cap allocation, most multi cap funds hold a diversified portfolio with a large cap bias, and carry significant allocation to mid & small caps. Some fund managers carry negligible allocation to lower market caps or completely ignore small cap segment, thus failing to meet the multi-cap mandate.

The SEBI has decided to modify the allocation norms in order to diversify the underlying investments of multi-cap funds across market capitalization and be true to label.

SEBI has directed fund houses to align their existing portfolio within one from date of publication of the next list of stocks by AMFI. Since AMFI will be publishing its next list in January 2021, fund houses can rebalance their existing portfolio by February 2021.

Expected change 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)

 

As of August 31, 2020, Multi-cap 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 assets is in cash, debt and others.

With the implementation of new norms, 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, with small cap stocks turning out to be the biggest beneficiary.

However, this shift is possible only if the fund houses continue with the multi-cap mandate and do not decide to move out from the multi-cap category by changing the fund’s category or mandate.

Moreover, the reaction of the investors will also play a big role in deciding the future of these funds. Investors who are not comfortable with increased allocation to mid and small caps, may decide to exit the fund, thus reducing the AUM of multi-cap funds.

The Challenges…

While SEBI’s tweak in the market cap allocation norms is a welcome move, there will be challenges for funds managers, especially those managing large sized multi-cap funds.

Some multi-cap funds having large AUM of around Rs 20,000 crore to Rs 30,000 crore will have to compulsorily 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.

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.

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