SEBI Circular on Multicap Funds – The Final word from SEBI on Multicap Funds and its Impact to Investors

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The SEBI Multicap definition conundrum which was set rolling on Friday came to an logical ending on Sunday .Latest Headline of Economic Times says so:

Which means that neither Investor nor Fund House do not have to panic and the Fund houses got the opportunity to Rebalance their portfolio in their Multi Cap schemes ,which means exercise any of the following options:

(1) Facilitate switch to other schemes by unitholders,

(2) Merge their Multi Cap scheme with their Large Cap scheme

(3) Convert their Multi Cap scheme to another scheme category, for instance Large cum Mid Cap scheme

So the AMCs got flexibility in their hands which is a good news.

The Background

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
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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

•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. After that representation the above mentioned circular from SEBI has come on Sunday offering the AMC flexibility to rebalance the multicap schemes.

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)

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In our opinion, they should change the name to Large Cap as it seems the more 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)

In our opinion these funds with slightly lower AUM may remain Multicap as they need portfolio rebalancing which has now been allowed. Also there is a weak possibility of changing to Large cap also, 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

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What lies ahead for Small Cap & Mid Cap  Investors?

Let us talk about “The Rs 40,000 cr fund bonanza” ET and larger market had prematurely celebrated 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:

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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