Hello Readers!
About a month back, SEBI comes up with a new regulation for asset allocation in Multi-Cap Funds, mandating, at least 25 percent of their portfolios to each of large-cap, mid-cap, and small-cap stocks by February 2021.
This new regulation came into force so that the asset allocation strategy of multi-cap funds follows the concept of true-to-label. It was analyzed by the SEBI that most of the multi-cap funds, because of no restriction on their asset allocation, earlier, they were freely allocating their assets majorly in large-cap-schemes, with almost 70-80 percent in large-cap stocks. The remaining was primarily invested in mid-cap stocks and a very small (almost negligible) component was invested in the small-cap firms.
This strategy followed by multi-cap funds for asset allocation wasn’t being true-to-label, and thus SEBI come up with the regulation.
But now to be in trend with the new rule multi-cap funds will now have to increase exposure to mid and small-cap stocks to a minimum of 50 percent (i.e., 25 percent each), and as mid-cap and small-cap stocks are high risks associated funds that means while following the new regulation, the risk associated with multi-cap funds will increase accordingly.
What To Do With The Increase In Risks?
With multi-cap funds following the new regulation for asset allocation, there will be a change in their risk profile. This has become a matter to think for those investors who invested in these funds for having a portfolio dominated with large-caps with a sprinkling of mid and small-cap stocks. Now, these investors are in dilemma, whether they should stay invested or exit from multi-cap funds?
Well, if answered honestly, it is too early to decide this.
The fund managers of multi-cap funds have various options to deal with this new change, and AMC’s will also follow different approaches to handle this regulation in the favor of investors.
They may reclassify multi-cap funds and shift to other less-restrictive categories such as focused, large & midcap or, even as value funds. It’s also possible that they may try to accommodate these changes by restructuring the portfolio by selling large caps and loading up on mid and small-cap stocks.
Fund managers can also look for other aspects keeping in mind the investor’s portfolio, to deal with this change. Like the advice to an investor who has a large-cap fund along with multi-cap funds, would be different from what it would be for someone else who only had a multi-cap fund with small-cap funds.
This approach will be considered because the underlying allocation to various market caps will be different for both at the overall portfolio level.
The Last Word Hasn’t Been Said
It’s not the end, the last word is yet to be announced. Currently, all stakeholders are making representation to the regulator, SEBI to rethink the new asset allocation regulation for Multi-cap funds. It is possible that the regulator SEBI may revise the regulation once more and come up with some favorable changes. Or may it increase the timelines for the complete implementation of this new regulation, to ensure a smooth transition?
There are also possibilities that to deal with this situation SEBI announces a new category such as ‘Flexi Cap,’ which will provide sufficient flexibility to existing multi-cap funds to operate as earlier.
So basically, for now, there are a lot of possibilities that might happen, and most importantly the sufficient information is still not available. AMC’s are doing their part of work and finding new approaches to make this regulation in the favor of investors. At the same time, they are also making representations to SEBI as mentioned earlier.
So here I would suggest waiting till the clarity emerges and AMCs declare their plan of action, only then the investors should assess the impact. A simple request to the investors, do not take any decision in panic or hurry.
If the plan of action taken by your AMC, keep the ‘revised’ multi-cap fund still within your risk profile, then continue holding the scheme, and if the decision of the funds does not match with your risk profile then exit those funds and find alternative fund categories.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).