September 11, 2020

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

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).

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%.

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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20 Comments

  1. ELSS is true multicap without capping level..fund manager has freedom and flexibility.
    25%debt I doubt..if so then there won’t be distinction between hybrid funds and multicap…it will be partial multi asset fund

    Reply
    • Dear Ranjan,
      Please read the definition of funds properly at first.

      Reply
  2. Basu,
    I guess now the fund manager has to do some homework on small and midcap companies and unearth the opportunities lying there. It’s probably going to do justice for the management fee investors pay.

    Now the nifty 50 and next 50 index funds might suffer with money being taken off these stocks.

    Reply
    • Dear Pradeep,
      It is their duty and that is why the investors pay hefty expenses than the passive funds. However, to what extent they be successful is known to god. Don’t think so that Nifty 100 will suffer. They merge with large cap funds.

      Reply
  3. You have mentioned debt as 25%. Does it mean they canโ€™t invest in international securities?

    Reply
    • Dear Sreekanth,
      They have not clarified on International Securities issues. So the fund manager has the freedom to invest like how the PPLEF doing now but with restriction as per the % mentioned above.

      Reply
      • Multicap category was widely recommended by Experts, Gurus and everyone even though many schemes are actually large cap oriented schemes due to high AUM.
        Index investor get ready for volatility in recent time due to high selling of largecap stocks to invest the same in Mid and Smallcaps as per above mandate.

        For a retail investor, Indexing is the only way forward.

        Reply
        • Dear Vinay,
          For such Gurus or advisers, 75% of asset moving to any market cap is NOT RISKY. But allocation to each market cap at 25% is huge RISKY ๐Ÿ™‚

          Reply
  4. Basu,

    Please explain , is it become mandatory for multicap funds to keep investing 25% of mid and 25% of small cap along with large cap stocks(25%) in all the time during investment. If so, then the fund become more riskier than before like Large &Mid cap fund.

    Going forward, Indexing becomes only route for equity investments in india.

    Reply
    • Dear Vandhi,
      Yes, they have to keep a minimum of that much. So no special role for the fund manager like how they have now. How can by such tilting, the fund became riskier? As per me, earlier the funds were riskier as they have FREEHAND. Do you think Large and Mid are riskier than Multi Cap?

      Reply
      • Earlier all Multicaps has invested more on large cap and 1/3rd of Midcap/small cap stocks. So the risk was not much. But now at least they have to keep 50% of Mid and Small cap stocks, So i feel riskier now.

        Reply
        • Dear Vandhi,
          Don’t go by the current status of Multi-Cap Funds as they are mainly tilted to large-cap. They may tilt the whole 75% in the mid and small-cap also without your consent (under the current definition). In such a situation, is it not a BLIND risk for the investor?

          Reply
  5. ELSS can invest across market capitalisation i believe. Fund managers can create alpha there i believe. Correct me if i am wrong basu sir.

    Reply
    • Dear Rajnesh,
      Yes, you are right. But whether they create alpha or not only god knows.

      Reply
      • 5yr return as on today..highest generated by ELSS fund (couple have generated 15%n over) only sectoral funds and international funds have beaten them

        Reply
  6. For the people who are scared of the small caps, there is a perfect option other than multicap. A large and midcap fund.

    Multicap was the one fund where active funds could really create an alpha by utilising the fund manager expertise. Now that is gone.

    Reply
    • Dear Kiran,
      How we can be so much sure that fund managers of Multi Cap Funds will create ALPHA?

      Reply
    • Very true,plain venilka index fund barely generated 7-8%in last 5yr

      Reply
      • Dear Ranjan,
        Then other funds at what cost generated more than index and for how long they can generate?

        Reply

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