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 31^st 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 liquid quality papers to honour these requests.

However, fund houses have to comply with the SEBI regulation.

Here are some moves that fund houses can take:

• Sell a large part of their large-cap stocks for mid-cap and small-cap stocks. This can lead to rally in the small cap and mid-cap stocks.

• Fund houses can merge their multi cap funds with a large cap fund

• They can convert the multi cap fund into large and mid-cap fund

• Fund houses like PPFAS Mutual Fund can look into revising the name of the fund and scheme category.

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:

• Don’t make any hasty decision. Wait for a formal communication from the fund house.

• It may be wise to go slow on multi cap investments. If you have a running SIP of more than Rs.50,000, you can look limiting your exposure to a comfortable level.

• You can stop any existing systematic transfers (STP) to multi cap funds. You can take steps based on the development.

• If you are not happy with the changes, you can redeem your mutual funds units by paying no exit load.

Conclusion:

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.