Multi cap fund is a category of equity mutual fund that can invest in stocks of all sizes such as large cap, mid and small-cap stocks. According to the SEBI’s earlier definition, multi cap funds have the flexibility to invest in different categories of funds with a minimum of 65% of their corpus in equity market.
However, on Sep 11, SEBI came up with a new circular to revise the definition of multi cap funds. The rationale behind this move is that multi cap funds should be true to their label. Most of the existing multi cap funds have a significant allocation to large-cap stocks with negligible exposure to mid-cap and small-cap stocks.
According to the new definition of multi cap funds, funds have to invest a minimum of 75% of its assets in equity instruments, out of which fund managers should invest at least 25% of the portfolio in large cap, small cap and mid-cap stocks.
Fund houses have to make amends and comply with the new rules within 31st January 2021.
What will fund houses do?
Multi cap funds are one of the largest mutual fund category. In September 2020, the category witnessed a monthly average asset under management of Rs. 1.45 lakh crores*.
As a result, fund houses were apprehensive about the exercise as complying with the SEBI standards may cause bulk sale of large-cap stocks that can affect the broader markets.
The lower liquidity in small and mid-cap stocks are also a concern for fund houses. Mutual fund houses have to honour investor’s redemption requests. We see that during testing times, fund houses sell their highly liquidquality papers to honour these requests.
However, fund houses have to comply with the SEBI regulation.
Here are somemoves that fund houses can take:
What should multi cap investors do?
As the move is likely to affect multi cap investors, they should remain cautious with their multi cap fund investments.
If you have invested in a multicap fund, here’s what you can do:
The recent development on multi cap funds will make these funds true to their name. As most funds had a lion’s share in large-cap stocks, after the exercise, investors will have a different category of fund to invest.
In this current scenario, it will be best to go slow on multi-cap investments, wait for a formal communication from the fund houses and take required actions.
Consult us to know more.
This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.