“True” Multi Cap Mutual Funds — 9/11 changes
What Is The New Rule
On Sep 11, 2020, SEBI announced changes in Multi Cap Funds.
“in order to diversify the underlying investment of Multi Cap Funds across Large, Mid & Small Caps and be true to label”,
As per the change, Multi Cap Funds to have a minimum of 75% equity investments with 25% in Large Cap, 25% in Mid Cap and 25% in Small Cap
Both new and existing funds will have to comply.
Another important part of notification is that Multi Cap Funds to comply by Jan 2021 within 1 month of date of publishing by AMFI
[AMFI, Association of Mutual Funds India, publishes the stocks list twice a year. Next publish is Due in Dec, 2020]
Difference Between “Then” and “Now”
Multi Cap Funds have flexibility to invest in Large Cap, Mid Cap and Small Cap companies. In terms of risk, there are considered less risky than Small Cap or Mid Cap Funds.
Pre notification, Multi Cap Funds had to keep 65% investment in Equity side with no restrictions. Now, the investment on Equity side has been increased to 75% where in Multi Cap Fund must invest in at a minimum of 25% in each i.e. Large, Mid and Small companies.
Fund Manager manages the allocation and thus risk factor in a Mutual Fund. Until last week, they had more control and flexibility i.e. If a Fund Manager feels next wave is in mid cap stocks, they could technically reallocate investment in mid cap stocks to realize gains. However, most Multi-Cap funds have greater percentage in Large Cap stocks and have less than 10% invested in Small Cap stocks.
One would ask or say — “Is that a true multi cap fund?” Or “In the interest of investor, Fund Manager lowered the risk but Returns might be lower than it could be!”
After the change, investor in the Multi cap fund knows that the maximum the Fund Manager can put in Large Cap Stocks in 50%, because, at a minimum, 25% will be invested in Mid-Caps stock and 25% will be in Small Caps stock. The intention of the regulator will definitely touch the end investor once funds comply with it.
Numbers For Re-Balancing
If you see, the Top 500 companies by market cap
· Around 78% is large cap
· Around 15% is mid cap
· Rest is Small Cap
Most of Multi Cap Funds have low investment in Small Cap companies (less than 10% on an avg)
Now, if you look at above two in conjunction, it will make sense why Multi-Cap have greater allocation in Large Cap companies!
For an investor, is it fair to invest 25% of total money each in mid cap stocks and small cap stocks? This can result in sharp increase in the risk on the overall portfolio.
Out of total AUM for Multi Cap Funds, it is estimated that around 35,000 Crore Rupees amount to be moved out from Large-Cap bucket and needs to be re-balanced into Small and Mid-size companies in upcoming months. Moreover, a large portion of this sum will needs to be invested in to Small-Cap Stocks to comply with the regulator.
There are lot of open questions that will be answered in upcoming months. For e.g.
a. Can this move lead to increase in Small Cap Stock prices and is it a good time to invest in Small cap companies directly [a small case!]?
b. How will this move affect the performance of Multi Cap Funds?
c. Should a Multi Cap Funds’ investor remain invested or redeem to move to another category?
d. Will investors invested in Mid Cap Fund Category and Small Cap Fund Category will see better growth ?
What Can an Asset Management Company (AMC) Do?
For an investor, it is good to think about what the AMC can do now.
In upcoming months, we will see how AMCs will react to the regulations and below can be few possibilities:
· AMCs comply with regulator and move allocation from Large Cap stocks to Small Cap stocks and Mid Cap Stocks, as per the regulation.
· An AMC may feel, this is not fair and it may want to change the funds category to another type where this restriction does not apply.
· If a large portion of portfolio is in Large Cap stocks, then, the AMC may want to merge the Multi Cap Fund with Large Cap Fund. [Remember: One AMC can have one active fund per cap type]. Since the funds is already invested with Large Cap stocks, it will makes sense to investor as well [But then…will the AUM be too high for Large Category fund to realize better gains?]
· An AMC may want to close the Fund and return the investor’s money.
Impact On Investor
· Investors in Multi Cap funds need to re-assess their portfolio and check if Multi Cap Fund still makes sense to their portfolio. E.g. If they already have invested a good portion of their portfolio on Mid-Cap and Small-Cap Mutual Fund, Multi Cap Fund may go down in their choice list.
· Investor need not panic and, I believe, no need to rush to redeem from Multi Cap Mutual Fund.
Investor should assess their risk profile, the action that the AMC is taking to comply with regulator and the market reactions. Based on the assessments, the investor should take the decision. As speculated, not all money with move from Large to Small and Mid-size companies. The amount is based on assumption that all AMCs will re-balance; however, there may be other routes that AMC may take.
Monitor changes, be careful and be aware so a thoughtful action can be taken!
PS: The views are solely based on personal experience and learning. Please invest smartly based on what is “better” for you. Happy investing!
