SEBI rules for multi-cap funds: Do they affect you?

Investors are showing a keen interest in equity-oriented mutual funds. A massive Rs 42.400 crore has flowed into these funds for the first six months of the year. The focus is now on the multi-cap schemes which invest in companies across market capitalisation. You may prefer investing in multi-cap schemes as the fund manager has the flexibility to move money across segments. Multi-cap schemes currently invest a minimum of 65% of assets in equity and equity-related instruments. However, the Securities and Exchange Board of India (SEBI) has changed the rules for multi-cap schemes. What are these new rules, and do they affect your investment?

SEBI has instructed multi-cap funds to invest at least 75% of total assets in equity instruments. Moreover, the funds must invest at least 25% of the corpus in large-cap, mid-cap, and small-cap stocks. Take, for example, a multi-cap scheme of a fund house that has assets under management (AUM) of Rs 20,000 crore. The fund manager would have to invest at least Rs 5,000 crore each in the three categories of stocks. The remaining amount is invested in any category. SEBI has asked the mutual fund houses to comply with these rules by February 2021. 

SEBI wants multi-cap funds to diversify the holdings across market capitalisation and stay true to the label. Several multi-cap funds have an allocation of over 70% of the portfolio to large-cap stocks. Mutual fund managers would have to churn around Rs 40,000 crore worth of stocks in the portfolio to comply with the rules. A significant amount of the portfolio could flow into mid-cap and small-cap stocks boosting the share prices. 

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Mutual funds are reluctant to invest in stocks of medium and smaller companies stating the lack of quality investments. Fund managers believe that multi-cap funds would be riskier for investors. SEBI has clarified that multi-cap funds will not have to churn the portfolio by purchasing small-cap stocks or selling large-cap stocks to comply with this rule. They could merge the existing multi-cap schemes with large-cap funds or reposition them as large-and mid-cap schemes. It could facilitate the switch by unitholders to another scheme. 

Top fund managers recommend that you stay invested in the existing multi-cap funds until mutual fund houses decide on a course of action. It might be a reclassification, merger with another category scheme, or a swap across mutual fund categories. You don’t need to hurry the decision as changes would take place gradually over the following months.

Check the portfolio of the multi-cap scheme to determine the holdings in large, medium, and small companies. Invest in multi-cap funds only if the investment matches your risk appetite. If you want a proper allocation in stocks across market capitalisation, then you may consider the investment. 

Multi-cap schemes have portfolios that are biased towards large-cap stocks. SEBI wants a true to label mutual fund with a sufficient holding in mid-cap and small-cap stocks. The final choice of making a good investment falls on the investor. You must invest in a mutual fund only after making a thorough study. Invest in multi-cap schemes only if you can invest for the long-run. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in