Multi cap fund is a category of equity mutual fund
that can invest in stocks of all sizes such as large cap, mid and small-cap
stocks. According to the SEBI’s earlier definition, multi cap funds have the flexibility
to invest in different categories of funds with a minimum of 65% of their
corpus in equity market.
However, on Sep 11, SEBI came up with a new
circular to revise the definition of multi cap funds. The rationale behind this
move is that multi cap funds should be true to their label. Most of the
existing multi cap funds have a significant allocation to large-cap stocks
with negligible exposure to mid-cap and small-cap stocks.
According to the new definition of multi cap funds,
funds have to invest a minimum of 75% of its assets in equity instruments, out
of which fund managers should invest at least 25% of the portfolio in large
cap, small cap and mid-cap stocks.
Fund houses have to make amends and comply with the
new rules within 31st January
2021.
What will fund houses do?
Multi cap funds are one of the largest mutual fund
category. In September 2020, the category witnessed a monthly average asset
under management of Rs. 1.45 lakh crores*.
As a result, fund houses were apprehensive about
the exercise as complying with the SEBI standards may cause bulk sale of
large-cap stocks that can affect the broader markets.
The lower liquidity in small and mid-cap stocks are
also a concern for fund houses. Mutual fund houses have to honour investor’s
redemption requests. We see that during testing times, fund houses sell their
highly liquidquality papers to honour these requests.
However, fund houses have to comply with the SEBI
regulation.
Here are somemoves that fund houses can take:
- Sell a large part of their large-cap stocks
for mid-cap and small-cap stocks. This can lead to rally in the small cap
and mid-cap stocks.
- Fund houses can merge their multi cap funds
with a large cap fund
- They can convert the multi cap fund into large
and mid-cap fund
- Fund houses like PPFAS Mutual Fund can look
into revising the name of the fund and scheme category.
What should multi cap investors do?
As the move is likely to affect multi cap
investors, they should remain cautious with their multi cap fund investments.
If you have invested in a multicap fund, here’s
what you can do:
- Don’tmake any hasty decision. Wait for a
formal communication from the fund house.
- It may be wise to go slow on multi cap
investments. If you have a running SIP of more than Rs.50,000, you can
look limiting your exposure to a comfortable level.
- You can stop any existing systematic transfers
(STP) to multi cap funds. You can take steps based on the development.
- If you are not happy with the changes, you can
redeem your mutual funds units by paying no exit load.
Conclusion:
The recent development on multi cap funds will make
these funds true to their name. As most funds had a lion’s share in large-cap
stocks, after the exercise, investors will have a different category of fund to
invest.
In this current scenario, it will be best to go
slow on multi-cap investments, wait for a formal communication from the fund
houses and take required actions.
Consult us to know more.
This blog is purely for educational purpose and not
to be treated as an personal advice. Mutual fund investments are subject to
market risks, Read all scheme related documents carefully.
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