Wednesday , September 23 2020
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SEBI’s ruling on Multicap Mutual funds: Necessary or unnecessary?

Summary:
On 11-Sep-2020, SEBI issued a circular asking multicap mutual funds to be true to their label. The Multicap funds are mostly invested in large cap stocks and not in midcaps and small caps as expected. Hence SEBI specified that multicap funds should invest minimum 75% of assets in equity of which 25% each should be in large, mid and small cap stocks. This led to some concerns as there are not enough small cap stocks. SEBI issued a clarification on 13-Sep (Sunday) saying the idea is to rationalise these schemes: Comparison with an appropriate benchmark: The scheme performance should be disclosed to the investors vis a vis an appropriate benchmark. For example, Large Cap schemes could have a benchmark of Sensex or Nifty 50 and at least 80% of the portfolio should be invested in Large Cap

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On 11-Sep-2020, SEBI issued a circular asking multicap mutual funds to be true to their label. The Multicap funds are mostly invested in large cap stocks and not in midcaps and small caps as expected. Hence SEBI specified that multicap funds should invest minimum 75% of assets in equity of which 25% each should be in large, mid and small cap stocks.

This led to some concerns as there are not enough small cap stocks.

SEBI issued a clarification on 13-Sep (Sunday) saying the idea is to rationalise these schemes:

Comparison with an appropriate benchmark: The scheme performance should be disclosed to the investors vis a vis an appropriate benchmark. For example, Large Cap schemes could have a benchmark of Sensex or Nifty 50 and at least 80% of the portfolio should be invested in Large Cap stocks.
Multi Cap schemes had flexibility in terms of allocation to Large, Mid and Small Cap stocks. However, it has recently been observed that some Multi Cap Schemes have skewed portfolios, with over 80% of investment in large cap stocks akin to Large Cap schemes, and some Multi Cap schemes have near zero or insignificant asset allocation to small cap companies.
Considering the above, in order to achieve the objectives of True to Label and Appropriate Benchmark, a need was felt to review the scheme characteristics of Multi Cap schemes and take necessary steps to clearly distinguish Multi Cap schemes from other category of
schemes.
In this context, SEBI has issued a circular dated September 11,2020 on Multi Cap schemes of Mutual Funds, requiring them to invest a minimum of 25% each in Large, Mid and Small Cap stocks, with the balance 25% giving flexibility to the fund manager.
Some sections of media have reported various views on the circular and various conclusions in respect of the same are being drawn. SEBI would like to clarify that Mutual Funds have many options to meet with the requirements of the circular, based on the preference of their unitholders. Apart from rebalancing their portfolio in the Multi Cap schemes, they could inter-alia facilitate switch to other schemes by unitholders, merge their Multi Cap scheme with their Large Cap scheme or convert their Multi Cap scheme to another scheme category, for instance Large cum Mid Cap scheme.
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.
Debashish Basu of Moneylife in a hard hitting article calls it a fatwa and uses Greek Procrustean fable to make his point.
I think a better approach would be to ask multicap funds to simply convert/merge into large-cap or some other fund. Nudging to simpler and lesser choices…
Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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