SEBI Circular on Multi Cap Funds: What should mutual fund investors do now?

Securities and Exchange Board of India, SEBI Circular on Multi Cap Schemes, asset reallocation of Multi Cap Funds, Mutual Fund, MF investmentThe majority of allocation of almost all the schemes of the Multi Cap category currently is in large cap, low in mid-cap and negligible in small-cap.

To ensure proper nomenclature of Mutual Fund (MF) categories and benchmarking of MF schemes, market regulator Securities and Exchange Board of India (SEBI) on September 11, 2020 had issued a circular mandating Multi Cap Funds to allocate least 25 per cent of their portfolios in large-, mid- and small-caps each by February 2021.

However, the majority of allocation of almost all the schemes of the Multi Cap category currently is in large cap, low in mid-cap and negligible in small-cap, which keeps the risk factors at a relatively low level.

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As risks increase with higher investments in mid- and small-caps, allocating 25 per cent of the assets in small-cap would make the schemes in the Multi Cap category very risky.

With majority of existing Multi Cap investors not having the tolerance capacity of such a higher risk, some of the options before them are –

  • Stop monthly investments through SIPs
  • Redeem Multi Cap schemes
  • Switch to a scheme of other category as per their choice
  • Wait for AMCs to merge the scheme with other scheme
  • Wait for AMCs to shift the scheme to other category
  • Assume higher risk as fund managers invest higher amount in small cap companies

So, what should investors in Multi Cap Schemes do now?

“The revised asset allocation for Multi Cap Funds as per SEBI’s latest guideline would drastically change the risk of the funds. However, those invested in Multi Cap Funds should avoid knee-jerk reaction to the revised norms by exiting those funds immediately. Multi Cap Fund investors should wait for more clarity from their fund houses regarding how they would position their existing Multi Cap Funds to comply with revised norms,” said Sahil Arora, Director,

“The fund houses are free to implement the SEBI guidelines for their existing Multi Cap Funds; or merge or rebrand their existing Multi Cap Funds with or as other fund categories like Focused Funds, Large Cap Funds, Value Funds, ‘Large and Midcap’ Funds, etc. Most fund houses are likely to decide keeping in mind their investors’ interest and portfolio quality,” he added.

“However, if the decisions of individual fund houses do not suit the risk profile of Multi Cap Fund investors, then such investors should exit those funds for Large Cap or ‘Large and Midcap’ funds,” Arora said.

“The assumption that all Multi Cap Funds will continue to remain in the Multi Cap category and be forced to increase small- and mid-cap exposure to 25 per cent is not a given. Asset Management Companies have a lot of options for their multicap funds such as 1) Shifting to a new category, 2) Merging with another category scheme. Further, AMFI has requested SEBI for introducing a new Flexicap category,” said Arun Kumar, Head of Research, FundsIndia.

“So, do not take any immediate decision (exit/reduce/switch) on your multi-cap funds – it is better to wait for more clarity on how each fund house is planning to handle this transition and then decide on a case by case basis,” he added.

Rachit Chawla, CEO and Founder, Finway FSC, also said, “At this point, the investors shouldn’t do anything. The AMCs need to comply only by Jan 2021. Afterwards, fund managers would have the option to comply with this without having to alter the composition of the fund.”

“Apprehensions would rise among investors as large cap companies has fared well in comparison to mid and small companies. This mandate would ensure shift from large cap companies to mid and small caps. Nonetheless, Cause of concern remains valid from a short term point of view which is skewed more towards large cap companies. However, this compliance would bring in clarity and thereby the classification would promote participation in broader market segment,” said S Ravi, Former Chairman of Bombay Stock Exchange(BSE) , Managing Partner at Ravi Rajan & Co.

“Regarding stopping SIPs, switching to any other scheme or withdrawal might not be worthwhile since investors are not compelled and do have ample options pertaining to portability of investments,” he said.

So, experts suggest the investors to wait and watch, as SEBI has given a number of options to the Asset Management Companies (AMCs) to avoid making the 25 per cent asset allocation to small-cap companies.

In case an investor doesn’t like the option exercised by the AMC managing the Multi Cap Scheme in which he/she had invested, he/she may take a decision to exit.

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