Asset Allocation of Multi-Cap Funds – SEBIs new categorization and Rationalization Rule

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SEBI has decided to partially modify the scheme characteristics of Multi-Cap Funds to be truly considered as Multi-Cap Funds. Let us see the Asset Allocation of Multi-Cap Funds as per this new SEBI guidelines.

Asset Allocation of Multi-Cap Funds

The old definition of Multi-Cap Funds

As per the SEBI Categorization and Rationalization of Mutual Fund Schemes circular dated 6th October 2017, Multi-Cap Funds were defined as below.

Scheme Characteristics – Minimum investment in equity & equity related instruments-65% of total assets.

Type of scheme (uniform description of the scheme) – Multi-Cap Fund-An open-ended equity scheme investing across large-cap, mid-cap, small-cap stocks.

I always skeptical about such a generic definition. The reason is that the fund manager has a freehand to move to any market cap as per his wish. For the investor, if the small caps are not suitable to his risk appetite, he still has to blindly follow the fund manager if his money invested in small-cap if the fund manager feels the opportunity in small-cap.

This used to create an unknown risk for the investor. Also, fund managers will not notify you such movement of asset allocation within the market cap. Hence, portoflio tracking reponsibility is fully with an individual investors. That is the reason, I always used to scare to recommend Multi Cap Funds (even though they are the favorite of many advisers or invetors).

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Asset Allocation of Multi-Cap Funds – SEBIs new categorization and Rationalization Rule

Now, I think understanding this dangerous freedom of Multi-Cap Funds, SEBI today (11th September 2020) notified the circular as below.

In order to diversify the underlying investments of Multi-Cap Funds across the large, mid and small cap companies and be true to label, it has been decided to partially modify the scheme characteristics of Multi Cap Fund at sr. no. 1 of point A of Annexure of the aforesaid circular as under:
# Minimum investment in equity & equity related instruments -75% of total assets in the following manner:

  • Minimum investment in equity & equity related instruments of large cap companies – 25% of total assets
  • Minimum investment in equity & equity related instruments of mid cap companies – 25% of total assets
  • Minimum investment in equity & equity related instruments of small cap companies – 25% of total assets

All the existing Multi Cap Funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021.

Notice that earlier the minimum equity part used to be 65% and now it increased to 75%.

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Conclusion:- I think this will give the biggest relief to the investors that now they know how much of their money is in a different market cap of the fund. I know it may create some constrain to the fund manager and few funds may start to underperform. However, from the investor’s point of view, I think this is a much-needed clarity. We have to cautiously check the performance of these funds after this change. I know many may struggle.

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Basu Nivesh
Basav is a SEBI Registered Investment Adviser (SEBI RIA) practicing the Fee-Only Financial Planning Service. He is a CFP (Certified Financial Planner) and blogger at Basu Nivesh. He services around 300+ satisfied clients.
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