SEBI Lists Options Multi-Cap Funds Have To Comply With New Rule

After fund managers raised concerns about the new rule on allocations within multi-cap funds, the market regulator clarified that the change was necessitated because of skewed portfolios and asset managers will be given multiple options to comply.

Some multi-cap schemes have more than 80% of investment in large caps, and some multi-cap schemes have near-zero or insignificant asset allocation to small cap companies, according to a clarification posted on the website of Securities and Exchange Board of India on Sunday.

Mutual funds can, among other things, facilitate switch to other schemes by unitholders, merge their multi-cap schemes with their large cap plans or convert multi-cap schemes to another category like large-cum-mid cap scheme, the regulator said.

The regulator said fund managers and sections of the media had drawn their own conclusions from the circular, it said. "SEBI is conscious of market stability and therefore has given time to the mutual funds till January 31, 2021 to achieve compliance with the circular, through its preferred route of which rebalancing of the portfolio is only one such route."

SEBI on Friday mandated that multi-cap schemes must invest at least 25% of their assets in each of large, mid, and small-cap stocks to remain "true to their label". It gave them time till February. Earlier, while such schemes had to invest 65% of their assets in equities, there were on category-wise thresholds.

Fund managers fear this will reduce flexibility in managing schemes even as brokerages estimated that between Rs 35,000 crore to Rs 50,000 crore may flow into small and mid caps after this change. And asset managers were already considering some of the options listed by SEBI.

Nilesh Shah, group president and managing director at Kotak Mahindra Asset Management Company, said in an investor call that the fund would not purchase small and mid cap stocks if it did not make sense for its unitholders. He outlined some options:

• Return money to clients.
• Switching to other equity funds.
• Merge multi-cap fund with large cap funds or large and mid-cap funds to maintain the same investment process and portfolio quality.
• Convert the multi-cap fund to a thematic fund like ESG (environmental, social and governance) fund to maintain investment process as well as portfolio quality.