How SEBI Rule on Multicap Funds will Impact Investors

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Let us quickly read few headlines of the leading media houses on SEBI rule change on the structure of Multi Cap mutual Funds:

Mint
Economic Times
CNBC

News headlines are elusive So what exactly has changed In Multicap Schemes ?

Earlier Multicap used to mean:

Diversified mutual funds which can invest in stocks across market capitalization. They are market capitalization agnostic.  These funds resort to dynamic portfolio shifts to  commensurate with the market condition.The minimum investment in equity and equity-related instruments was 65% of the total assets.There were No sectoral allocation restriction

Now the new definition includes:

Minimum investment in equity & equity related instruments : 75% of total assets in the following manner :

  1. Minimum investment in equity & equity related instruments of Large
    Cap
     companies – 25% of total assets
  2. Minimum investment in equity & equity related instruments of Mid
    Cap
     companies – 25% of total assets
  3. Minimum investment in equity & equity related instruments of Small
    Cap
     companies – 25% of total assets
The Timeline to modify the fund structure is Till Feb 2021

Here goes the SEBI definition of all “Caps”

As the fund size grows:

•The exposure to large cap increases as small caps and mid cap do not have liquidity to absorb the cash inflows

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•Small Caps & Mid Caps stock are generally small in size and holds uncertain future

Cap wise allocation of existing Multicap Funds

Source: Bloomberg Quint

•If the fund managers for example Kotak Standard Multicap Fund with abysmal Small cap holding of 1% have to increase it allocation to the stipulated cap of 25% of its AUM then, it would have to allocate to Rs. 7400 Crores to purchase Small Caps stocks.

Currently, only HDFC Small Cap Fund & Nippon Indian Small Cap funds are the only 2 small cap funds with ~Rs 7400 cr AUM in that segment. Kotak AMC  together with Industry players shall make a representation to SEBI for either Renaming  to “Flexicap” Or Extension of deadline.

What lies ahead for existing investors?

Type 1:If you are holding scheme with > 65% exposure to Large cap and large AUM Size (>Rs 5000 cr)

In our opinion changing to Flexicap seems the logical option, hence investors are requested to wait for communication from AMCs

Type 2:If you are holding scheme with > 65% exposure to Large cap and small AUM Size (<Rs 5000 cr)

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In our opinion these funds with slightly lower AUM may remain Multicap as they need portfolio rebalancing , Also there is a possibility changing to Flexicap if deemed fit, hence investors are requested to wait for communication from AMCs

Type 3:If you are holding a truly Multicap Fund

These fund are almost Multicap with few minor changes required to be done. In most probable case they will remain to be Multi cap fund hence the investor should not be worried as the changes shall be smooth .

What lies ahead for New investors?

1.Volatile returns in the beginning

2.Post February True Returns and diversification benefit shall start accruing

3.Investors with Mid & Small cap fund holding need not to invest into Multi cap as going forward Multicap funds  shall invest in Small + Mid caps

What lies ahead for Small Cap & Mid Cap  Investors?

Let us talk about rs 40,000 cr fund bonanza ET is talking about.As per our analysis:

1.Expecting a Fund flow of Rs 15,000 cr to Mid caps & Rs 25,000 cr to Small caps is a wishful thinking.

 2. However fund flow to these segments shall increase over medium term

3. Overall a Positive impact for Small + Mid Cap investor

A 10 min video explaining the topic in detail might be of interest to you:

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Sadhan is an Investment vlogger http://www.youtube.com/c/sadhansimplified.

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Amitabh Vatsya
Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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