Understanding Multi-Cap Funds: Recent Changes and Implications

Multi-cap funds are a type of equity mutual fund that invests across various market capitalizations, including large-cap, mid-cap, and small-cap stocks. Traditionally, these funds had the flexibility to allocate investments across different market caps, with a minimum of 65% of their corpus invested in the equity market, as per the Securities and Exchange Board of India (SEBI). See below for the What is Multi Cap Funds SEBI’s Rules for Multi-cap Funds in detail.

What is Multi Cap Funds SEBI’s Rules for Multi-cap Funds

On September 11, SEBI introduced a revision in the definition of multi-cap funds to ensure they align more closely with their designation. This move came in response to the observation that most multi-cap funds were heavily inclined towards large-cap stocks, with minimal exposure to mid-cap and small-cap stocks.

Key Changes Defined

Under the revised guidelines, multi-cap funds are now required to allocate at least 75% of their assets to equity instruments. Importantly, this allocation must include a minimum investment of 25% each in large-cap, mid-cap, and small-cap stocks.

Compliance Deadline

Fund houses were given a deadline until January 31, 2021, to comply with these new regulations.

Impact on Fund Houses

Given that multi-cap funds represent one of the largest categories in the mutual fund sector, with assets under management reaching Rs. 1.45 lakh crores in September 2020, this directive posed significant challenges. Concerns were raised regarding the potential market impact due to the forced sale of large-cap stocks and the liquidity issues in smaller cap stocks.

Potential Strategies for Compliance

To align with SEBI’s requirements, fund houses may consider several strategies, such as:

• Rebalancing portfolios to meet the specified cap allocation.
• Merging multi-cap funds with large-cap funds.
• Converting multi-cap funds into large and mid-cap funds.
• Renaming funds and changing scheme categories, as seen with PPFAS Mutual Fund.

Guidance for Multi-Cap Investors

Investors in multi-cap funds should approach these changes with caution.

Recommended Actions for Investors

• Avoid making impulsive decisions before receiving official communication from the fund house.
• Consider moderating multi-cap fund investments, especially for substantial SIPs.
• Pause any systematic transfers to multi-cap funds until further developments.
• If dissatisfied with the changes, investors have the option to redeem their units without an exit load.

Conclusion

The adjustments to the multi-cap fund definitions aim to ensure that these funds truly reflect their intended investment scope, offering a diversified exposure across market caps. As the landscape evolves, investors should stay informed, seek formal advisories from their fund houses, and make educated decisions regarding their multi-cap fund investments.

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