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Last year, the regulator of Mutual Funds in India, SEBI (Security Exchange Board Of India), revised the asset allocation strategy for Multi-cap funds and brought some mandates. SEBI stated that for multi-cap funds, it would be necessary to allocate at least 25% of its asset each in large, mid, and small-cap stocks. This mandate was brought to make the multi-cap schemes true-to-label.

Later, SEBI came up with another announcement, allowing fund houses to have a new Flexi-cap category, that would have no restrictions for its asset allocation in different market capitalizations.

Who Converted And Who Remained In The Category?

As per the SEBI, the new mandate for asset allocation in Multi-cap funds was applicable from 1^st February 2021, thus it was directed to fund house to go converting their multi-cap funds into the new Flexi-cap category if they want to.

There were a total of 35 multi-cap fund schemes out of which around 25 schemes were converted to Flexi-cap funds. The remaining 10 schemes continued to be multi-cap funds. The 10 schemes that remained in their category, have a large chunk of assets invested in large-cap stocks (close to 80 percent). Thus, most of these large-sized schemes converted to being Flexi-cap funds.

Currently, the total AUM (Assets Under Management) of Flexi-cap funds is Rs 1.6 lakh crore.

However, two schemes, despite having a large size, remained in the category of Multi-cap funds. These schemes are Nippon India Multi-cap Fund and ICICI Prudential Multi-cap Fund.

These funds, as they were having a chunk of assets in large-cap stocks, had to liquidate and reinvest their assets, so that can meet the mandate of asset allocation for multi-cap funds.

If we see the details, then Nippon India Multi-cap a total AUM of Rs 7,459 crore, as of October 2020. To meet the mandate for asset allocation for multi-cap funds, it had to liquidate around 600 crores from its large-cap holding and deploy Rs 150 crore and Rs 447 crore into mid and small-cap stocks, respectively.

Sailesh Raj Bhan, Deputy CIO Nippon India Mutual Fund says that “Achieving the new mandate was comfortable for us because our multi-cap fund always managed to match the true-to-label concept from last 15-20 years. Our fund already had a significant allocation towards mid (23 percent) and small-cap stocks (19 percent).”

The second fund that remained in the category is the ICICI Prudential Multi-cap Fund that has a total AUM of Rs 5,288 crore. As per the reports it liquidated around Rs 1100 crore from large-caps and deploy Rs 317 crore and Rs 800 crore in mid and small-cap stocks, respectively.

Chintan Haria, Head-Product Development & Strategy, ICICI Prudential AMC says, “we were very easily able to achieve the true-to-label mandate because there were certain elements of mid and small-caps already present in the fund.”  

Should An Investor Invest In The New Allocation Strategy Of These Funds?

Well, as these funds have increased their allocation in small-cap and mid-caps, market capitalization thus increasing the risk component, as these cap categories are riskier than the large-cap category. Now, investors are confused about whether should look forward to investing in these funds with the new asset allocation strategy or not?

However, experts say now it is up to investors, what they want to prefer and go with. They say if investors wish to invest in an equity fund that deploys assets meaningfully across large, mid, and small-sized companies, then multi-cap funds should ideally be in your portfolio.

And if you do not want to take that much risk in their portfolio, they can go investing in new Flexi-cap category funds, that have no restrictions or mandates regarding its asset allocation in different market capitalization.

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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 to future returns).