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S.E.B.I being the regulator of CAPITAL MARKET issued a circular dated 11-September-2020 brought the change in the MULTI-CAP SCHEME of Mutual funds. Let us know what does multi-cap scheme is all about and the new changes introduced regarding this scheme.

Definition of Large Cap, Mid Cap and Small Cap Companies : SEBI has, vide its circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated 6th October 2017, defined large cap, mid cap and small cap companies in order to ensure uniformity in respect of the investment universe for equity mutual fund schemes. Further, SEBI has also stipulated that AMFI shall prepare the list of stocks in this regard.

Large Cap 1st -100th company in terms of full market capitalization 
Mid Cap    101st -250th company in terms of full market capitalization
Small Cap 251st company on wards in terms of full market capitalization

Accordingly, AMFI, in consultation with SEBI and Stock Exchanges, has prepared the list of stocks, based on the data provided by Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI).

MULTI CAP FUND : These funds invest in companies having different market capitalization, the fund manager average out the return from investing in different companies (large,mid, small cap) according to the returns.

Now the changes that has been brought by SEBI is in line with an earlier circular dated (06-October-2017) CATEGORIZATION & RATIONALIZATION OF MUTUAL FUND SCHEME with objective of TRUE TO LABEL SCHEME i.e. the portfolio should reflect the name of the scheme and name should correctly reflect the nature of the scheme.

Investment in  Large Cap Mid Cap Small cap Total
 – Equity No Limit No Limit No Limit Minimum 65%
 – Equity Minimum 25% Minimum 25% Minimum 25% Minimum 75%

The above table it self clears that after improvising changes in the multi cap scheme allocating 25% of funds into each large/mid/small cap category will now correctly reflect the nature of the scheme by diversifying funds across the sectors in equal proportion. This circular is issued by SEBI as it gives exposure to mid/small cap stocks as well as their growth, larger portion of funds which earlier was allocated to large cap are now equally balanced among large,mid,small cap stocks.

Time limit given to the fund houses to bring about the change in the present allocation to new allocation of 25% each is up to 31, January 2021, in continuation of circular of 11 September SEBI issued another circular dated 13, September 2020 which clarified that mutual funds have many options to meet the requirement based on unit holder preference apart form re balancing the portfolio which are as follows.

 –  May allow investor to switch to another scheme 
 –  Might merge multi cap scheme with large cap scheme  OR
 –  May convert their Multi cap scheme into another category (thematic, flexi-cap etc.) 

These all options depends on the Fund House & fund manager of the scheme whether he will re-balance the portfolio accordingly or will merge into another scheme category of the fund.

EXAMPLE : Quoting the example one of the multi cap scheme – KOTAK STANDARD MULTI CAP FUND having a largest AUM of Rs 29,300 crores in this category. The August 2020 end data of this scheme have allocation of 74% in large cap, 21% in mid cap, 1% in small cap category will now have to change which will result in selling of 49% from large cap category and purchasing of 4% in mid cap stocks & 24% in small cap category.

Earlier Allocation of funds in mid/small cap companies were not in larger portion as it restricted the liquidity, exit route in the small cap companies is tough, financial data & corporate governance standards available for public might not be much reliable for fund manager to decide about the investment in such companies.

Investor should have patience 
No change in the on going scheme un-till fund house decides about the acceptance of change in the required proportion or to merge into another scheme.    
SEBI might also review its circular after seeking into practical difficultly which fund house may face going into the new allocation. 


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April 2024