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SEBI has issued a circular on 11th September 2020 revising guidelines for asset allocation of multi cap mutual fund with a view to bring in real diversifying characteristics to multi cap fund true to its name.

Earlier there were no restrictions on market cap allocations set by multi cap fund. The fund manager of the multi cap fund has the discretion to allocate the assets of the multi cap fund among large, mid and small cap fund. With this majority of multi cap funds are more tilted towards large cap stocks having large exposure to only one group of market cap stocks and lost their true nature of being diversified multi cap.

As per the revised guidelines, multi cap funds will be mandatorily required to invest minimum 75% of total assets in equity and equity related instruments (against earlier minimum requirement of 65%).  Within the equity class, SEBI has also mandated minimum 25% of total assets of multi cap fund scheme will be required to be invested each in large, Mid and small cap stocks.

SEBI has further given time up till 31st January 2021 to rebalance, reshuffle, and reclassify or merge their existing multi cap fund with other existing funds in order to comply the revised guidelines.

As of August 31, 2020, multi cap funds had a total AUM of around Rs 1,46,663 crore, of which around 74% is invested in large caps, 16.4% in mid caps, and just 6% in small caps. Around 3.6% of the asset is in cash, debt, and others.

Table -1 below shows current AUM position in multi cap scheme and the estimated shifts required in mid and small cap according to new guidelines.

Current AUM and Estimated shifts in portfolio according to new guidelines
Scheme Name  AUM
(Rs in Cr)
 Minimum Allocation Change required (in Cr)
 Large   Mid  Small
Aditya Birla Sun Life Equity 11023 -2148 67 2081
Axis Multicap 6434 -2868 1327 1541
Baroda Multi Cap 825 -226 45 182
BNP Paribas Multi Cap 555 -163 85 77
BOI AXA Multi Cap 40 -1 1 0
Canara Robeco Equity Diversified 2280 -620 169 451
DSP Equity 3726 -773 62 711
Edelweiss Multi Cap 560 -139 55 84
Essel Multi Cap 176 -46 15 31
Franklin India Equity 8591 -2567 1075 1492
HDFC Equity 19798 -7353 3232 4121
HSBC Multi Cap Equity 330 -90 31 59
lClCl Prudential Multicap 5594 -1472 577 895
IDBI Diversified Equity 290 -55 18 37
IDFC Multi Cap 4847 -557 557
Invesco India Multicap 925 -28 28
ITI Multi Cap 134 -39 20 20
JM Multicap 131 -51 18 32
Kotak Standard Multi cap 29714 -8688 1798 6889
L&T Equity 2366 -573 221 352
LIC MF Multicap 295 -65 8 57
Mahindra Manulife Multi Cap Badhat Yojana 340 -71 14 57
Motilal Oswal Multicap 35 11240 -4463 2222 2241
Nippon India Multi Cap 8053 -431 431
Parag Parikh Long Term Equity* 4508 -749 411 338
PGIM India Diversified Equity 226 -33 12 21
Principal Multi Cap Growth 654 -137 31 106
Quant Active 36 2 1 -2
SBI Magnum Multi Cap 9063 -2240 609 1631
Shriram Multi Cap 58 -17 5 11
Sundaram Equity 600 -180 83 96
Tata Multicap 1695 -315 38 277
Taurus Star share (Multi Cap) 200 -68 24 44
Union Multi Cap 371 -98 48 49
UTI Equity 10983 -2100 2100
Potential Buying and (Selling) estimated 146661 -39422 12322 27097
Potential Buying and (Selling) estimated (%) 100 -27 8 18
*The foreign stock in the fund are assumed as large caps as their market cap is bigger than Indian large cap companies.
Note: All figures are rounded off to nearest integer

Source of information: Value research

Notably, with a total AUM of around Rs 1,46,663 crores (as of August 2020), multi-cap funds are the second largest category in the equity fund segment.

Post rebalancing of the portfolio to comply with the new guidelines, large cap allocation in multi cap funds would come down to 50% or less from the current ~75%. Meanwhile, a significant portion of the corpus (around Rs 40,000 crore) is expected to shift towards mid and small caps over the next 3 to 5 months.

Multicap funds with larger AUM may face difficulty in re-shuffling their portfolios. Merger of Multicap fund with their Large cap funds or Large & Midcap category could be way out for some AMCs. Some AMCs could re-define the fund to a thematic fund maybe an ESG fund; and at a later stage launch another Multicap fund.

Schemes requiring the least reshuffling are multi cap funds from Invesco, IDFC and Nippon, while schemes requiring the most reshuffling include Kotak Standard, HDFC Equity, Motilal Multicap 35, Axis and Canara Robeco Eq diversified fund.

Many of the investor expect that the new guidelines implemented in present form would severally impact the multi cap funds and exposure to mid and small cap fund shall give them better returns than multi cap fund due to outflow of large cap stock in and inflow of small and mid caps stocks.

Our Conclusion:

Investor should not take any hasty decision of rebalancing their existing investment in multi cap fund, one must wait for clarity from fund manager. There may be a case where fund house may decide to change the category of the existing multi cap either in large cap or large and mid cap or, focus fund or thematic fund category rather than rebalancing the existing portfolio of the multi cap fund and later on come with the new fund in multi cap fund category.

Further SEBI has given time period of 1 month from the date of half yearly publishing of next list of stocks in large mid and small cap category by AMFI in December 2020. Hence investor has enough time period of 4 to 5 months if need arises to take any decisions after they have more clarity from the fund houses.

At the same time, for any fresh investment, we recommend investor to invest in large and mid cap or mid or small cap category and avoid the multi cap funds having large AUM.

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