Hello Readers! 

You must have come through the trending news in the market about new circular for the asset allocation of Multi-cap mutual funds, and the commentary that followed. Well, let us know what all this is about, why it came in force, and everything related to it.

The New SEBI Circular For Multi-Cap Mutual Funds

On 11^th September 2020, the Security Exchange Board of India (SEBI) announced a new circular for asset allocation in mutual funds. This circular is a continuation of SEBI’s “true to label” philosophy - get what you buy. As per SEBI’s new circular, from January 2021 multi-cap funds must allocate a fixed percentage of their assets in large, mid, and small-cap funds.

The scene was not the same earlier, instead of earlier the fund managers of Multi-cap funds handled the asset allocation in multi-cap funds freely with a minimum allocation of 65% to equity and equity-related instruments. But now with the new weightage will include around 75% in Equity instruments with category mandates as follows:

• The minimum investment in large-cap companies: 25% of total assets
• The minimum investment in mid-cap companies: 25% of total assets
• The minimum investment in small-cap companies: 25% of total assets

For the new circular to be implemented completely, SEBI has given time to mutual funds till 31^st January 2021, as sudden changes in the strategies of investment can affect the stability of the market. The new rules will be effective sometime during the first week of February 2021.

Why Was This Step Taken? 

In the early circular for mutual funds, it was made mandatory for Multi-cap mutual funds to invest at least 65% of its assets in equity and equity-related instruments, without any category limits. When the asset allocation of multi-cap funds was analyzed, it was found that some multi-cap schemes have skewed portfolios, with over 80 percent of investment in large-cap schemes, and some multi-cap schemes have near-zero or insignificant asset allocation to small-cap companies.

Therefore, in order to maintain the objectives of True to Label and appropriate benchmark, SEBI comes up with a circular mandating the asset allocation limits for Multi-cap funds, in different categories of equity funds.

What Should You Do As An Investor? 

Well, at this point there is no need to do anything. The AMCs need to comply only by Jan 2021. Further, fund managers have options to comply with this new circular without altering the composition of the fund. Here I could suggest, have a look at your fund manger’s or AMC strategy, and as per their strategies you can decide your next move for your investment.

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 to future returns).