For now, there are just too many possibilities and variables, and sufficient information is still not available. AMCs are figuring out what to do and also making representations to SEBI
About a month back, SEBI issued a new circular asking multi-cap funds to allocate at least 25 percent of their portfolios to each of large-cap, mid-cap and small-cap stocks by February 2021.
Earlier, there were no market-capitalization wise requirements/restrictions on multi-cap funds. As a result of this freedom, a majority of the multi-cap funds were operating as large-cap schemes in disguise, with almost 70-80 percent (or even higher) parked in large cap stocks. The remaining was primarily invested in mid cap stocks and a very small (almost negligible) component was invested in the small-cap firms. SEBI was of the view that such allocation wasn’t being true-to-label.
But to adhere to the new rules, multi-cap funds will now have to increase exposure to mid and small-cap stocks to a minimum of 50 percent (i.e., 25 percent each). And given the volatile nature of mid & small cap stocks, this means that the risk associated with multi-cap funds will increase accordingly.
Increase in risks
This change in risk profile of multi-cap funds means that those who invested in these funds for having a portfolio dominated with large-caps with a sprinkling of mid and small-cap stocks are now a worried lot trying to decide whether to stay in multi-cap funds or move out.
Multi-caps were one of the favorite (and one of the largest) fund categories as they gave investors an easy way to participate across different market caps via just one fund.
So what should you do?
To be honest, it is too early to say anything with conviction.
Fund managers have various options to handle this change. And I think different AMCs will opt for different approaches. They may reclassify multi-cap funds and shift to other less-restrictive categories such as focused, large & midcap or, even as value funds. Or, they may opt to merge with other schemes in different categories. It’s also possible that they may try to accommodate these changes by restructuring the portfolio by selling large caps and loading up on mid and small-cap stocks.
But this is only one aspect. There is another aspect and that depends on the investor’s portfolio.
So if someone has a large-cap fund along with multi cap funds, then the advice for him will be different from what it would be for someone else who only had a multi-cap fund with small cap funds. That is because the underlying allocation to various market caps will be different for both at the overall portfolio level. So that should be considered too.
The last word hasn’t been said
And that’s not all. Currently, various stakeholders are making representations to the regulator to rethink the change. It’s possible that the change may be revised a bit. Or the timelines for the implementation may be increased to ensure a smooth transition (this is important, as many funds with large AUMs will find it tough to buy small-caps after selling their large-caps without impacting their prices in the short term). Then, there is another possibility. The regulator might announce a new category such as ‘Flexi Cap,’ which will provide sufficient flexibility to existing multi-cap funds to operate as earlier.
So, for now, there are just too many possibilities and variables, and sufficient information is still not available. AMCs are still figuring out what to do and also making representations to SEBI as mentioned earlier.
If the eventual decision of the funds does not match with the risk profile of an investor, then such investors will have to exit those funds and find alternative fund categories.
Once clarity emerges and AMCs declare their plan of action, only then the investors should assess the impact. They should not be in a hurry to act. They should consider what their mid & small- cap allocation in the overall mutual fund portfolio is. If keeping the ‘revised’ multi-cap fund is still within the investor’s risk profile, then one can continue holding the scheme.So, wait and watch for the next few weeks as it will soon become clear what individual fund houses are planning to do with their multi-cap funds.