SEBI AMENDMENTS ON ASSETS ALLOCATION OF MULTI CAP FUNDS

Background

SEBI vide it’s circular no. SEBI/HO/IMD/DF3/CIR/P/2020/172 dated 11th September, 2020 has revised the asset allocation criteria of Multi-Cap Funds in India wherein it had stated that AMCs have to invest at least 75% of the assets of the scheme in the Equity investments  as per the below criteria:

1. The minimum investment in equity & equity related instruments of large-cap companies – 25% of total assets

2. The minimum investment in equity & equity related instruments of mid-cap companies – 25% of total assets

3. The minimum investment in equity & equity related instruments of small-cap companies – 25% of total assets

All AMCs are required to comply with these guidelines for their Multi-Cap Funds within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021.

Erstwhile the criteria of definition and asset allocation criteria of Multi Cap funds were governed by the SEBI circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017 as per which AMCs was required to invest a minimum 65% of AUM size in Equity & Equity related instruments, and the fund manager had the liberty to choose allocation to small-cap, Mid Cap and Large Cap companies as per his discretion.

Important Definitions

1. Multi-Cap funds: These are those set of funds that invest across all companies i.e Large Cap, Mid Cap, and Small Cap.

2. Large- Cap Companies: Securities and Exchange Board of India (SEBI) defines large-caps as the largest 100 companies in terms of market capitalization.

3. Mid-Cap Companies: As per the SEBI, mid-caps comprise of companies ranging from 101 to 250 in terms of market capitalization.

4. Small-Cap Companies: According to SEBI, all companies from the 251st company in terms of market capitalization can be considered as small-cap stocks.

Analysis of Existing Multi-Cap Portfolio of the few largest AMCs in India

As per the existing circular of SEBI on assets allocations under the category of Multi-Cap Funds category, the fund manager was free to choose the asset allocation as per his wisdom, the fund managers of Multi-Cap Funds were running these schemes more or less akin to the large-cap funds.

Multi-Cap Funds managed by the largest AMCs of India are having exposure in Large Cap Companies as high as up to 90%, which needs to be reshuffled by the AMCs, if the above circular is not withdrawn by the SEBI.

The below table depicts the size of Mid Cap Funds, Size of Small-Cap Funds, % of Large Cap Stocks held under these schemes, etc. as per the monthly portfolio disclosure by AMCs as on 31.08.2020.

S.No. Name of AMC Size of Multi Cap Fund (Rs. In Cr) Existing % of Large Cap Stocks 25% of Multi Cap Funds (Rs. In Cr) Size of existing Small Cap Funds (Rs. In Cr)
1 Axis MF 6,434.07 92.49% 1,608.51 2,720.14
2 HDFC 19,797.97 85.88% 4,949.49 8,645.20
3 Kotak 29,714.06 77.69% 7,428.51 1,667.02
4 Aditya Birla 11,023.35 68.17% 2,755.83 2,116.60
5 SBI 9,063.31 72.07% 2,265.83 5,039.24

(Source: Monthly portfolio disclosed by the AMCs as on 31.08.2020)

Key impacts which the circular might have on the industry:

  1. AMCs which are having maximum exposure in the large-cap stock need to reduce their exposure to Large Cap stocks and raise their exposure in Small-Cap/ Mid Cap stocks. In the current global economic situation, AMCs might find it difficult to choose good quality Mid-Caps and Small-Caps at fair valuations which may lead to the rising of valuation of Quality Mid-Caps and Small-Caps.
  2. If AMCs find it difficult to allocate money to good quality Mid Caps and Small Caps in the Multi-Cap Category, they might consider stopping fresh allotment/issuance of units under the scheme.
  3. Investors who were investing in Mid Cap Funds as an alternative to the Large Cap Funds may now shift to Large Cap Funds which may result in significant withdrawal of money from Multi-Cap Funds.
  4. Selling in Large- Cap Stocks by AMCs in upcoming days may lead to correction in major indices.
  5. AMCs may approach SEBI for reconsideration of it’s decision due to adverse effects it may have on the industry.

Concluding Remarks:

Time will unfold how AMCs which were running the Multi-Cap funds akin to the Large Cap Funds, will comply with the circular as it might require major reshuffling in the portfolio of Multi-Cap schemes, they need to invest huge amount approximately 40-50% size of the small-cap funds to larger than the size of the small-cap fund they are running at the time or the SEBI will withdraw the circular. 

Written by- CA Kanj Goel-Kanj3101@gmail.com

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Name: KANJ GOEL
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Company: Tradex India Corporation Private Limited
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Chartered Accountant having 10 years+ experience in Taxation Advisory, Financial Advisory, Financial restructuring, Funds Management, Consolidation of accounts, MIS. Stock Market Investor, Learner, Reader. View Full Profile

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