New SEBI rules were necessary, but would they be workable?
On 11 September, SEBI announced key changes to the design and composition of multi-cap funds. These funds give the investors exposure across large caps, mid caps and small caps. What are the key changes made and what were the triggers for these changes?
What SEBI has recommended
With reference to multi-cap funds, SEBI has made two key recommendations. Firstly, the regulator has now made it mandatory for multi-cap funds to have at least 75% exposure to equity and equity related instruments. In the past, it used to be 65% giving the manager a lot more leeway to look at temporary opportunities in debt or even hold cash in the interim period. That leeway has been substantially reduced by SEBI.
The second change announced by SEBI is a lot more significant from an asset allocation perspective. It mandates that 25% of the allocation of the multi-cap fund must at least be allocated to large caps, mid caps and small caps as part of the new shift. This is important because the current asset allocation by multi cap funds is largely skewed in favor of large cap funds. Currently, over 65% of the assets of multi-cap funds are allocated to large caps with just about 15% and 10% allocated to mid caps and small caps respectively. That raises issues of a big shift in investment portfolios of the multi cap funds and could also pose a challenge in terms of liquidity.
SEBI is definitely justified
There is an eminent logic to the change made by SEBI. Most multi-cap funds have up to 80% of their allocation in large caps and hence many of the multi cap funds are not very different in their performance compared to large caps. Secondly, the whole purpose of SEBI reclassifying funds in 2018 was ensuring that the fund nomenclature reflected the purpose and the portfolio composition of the particular fund. There were two problems here. Firstly, many multi-cap funds were almost indistinguishable from large cap funds and defeated the purpose they were intended for. Also, multi-cap definition had given too much leeway to the fund manager and had almost become like a dynamic fund. That needed to be changed.
Will this benefit small stocks?
Prima facie, small stocks will benefit. Multi Cap funds have an AUM of Rs.1.47 trillion with over 65% in large caps and just about 15% in mid caps and 10% in small caps. The inflows into mid caps and small caps should be Rs.14,000 crore and Rs.20,000 crore respectively. Clearly, that is going to imply a lot of selling in large caps and big buying in small caps and mid caps. While that should support the price of smaller stocks, it could create a major liquidity challenge in the small cap and mid cap space. The intent is good, but it may be slightly impractical in implementation!
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