Sebi's multi-cap fund norms may see Rs 25-35K crore move from largecaps to mid and smallcaps

The Securities and Exchange Board of India (Sebi) on September 11 changed the investment norms for multi-cap funds, saying a minimum of 25 percent of the corpus should each be invested in large, mid and smallcap stocks.

As a result, the minimum investment in equity and equity-related instruments by mutual fund houses has to be 75 percent of total assets, against 65 percent earlier.

"Minimum investment in equity and equity-related instruments of large cap, midcap and smallcap companies needs to be 25 percent each of the total assets," the capital markets regulator said in a circular.

"All the existing multi-cap funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, ie January 2021."

At present, 70-75 percent of the equity allocation is towards largecaps, 15-20 percent midcaps and 5-10 percent in smallcaps. The Sebi's move could see a liquidity shift to mid and smallcaps, experts said.

Also read: Mutual funds set to approach SEBI with a range of options

"The move by the regulator is structural. As on August 2020, the assets under management (AUM) under multi-cap funds were around Rs 1.45 lakh crore. Of these, around 70-75 percent of the funds were invested in largecap stocks and rest in mid-smallcap stocks. So we are estimating around Rs 30,000-35,000 crore additional liquidity for the mid-smallcap space," Choice Broking said.

As less than 10 percent of the multi-cap AUM is in smallcap companies, these categories will be flush with liquidity, it said.

Citing the example of the Kotak Standard Multicap Fund scheme, which has an AUM size of Rs 29,714 crore, has just 1 percent exposure to smallcap funds. Its exposure to midcap space is 18.3 percent. It means that the fund manager must allocate Rs 7,000 crore to smallcap category and around Rs 2,000 crore to midcap category, while the largecap category of this scheme will see an outflow of at least Rs 9,000 crore.

Also read: SEBI move on multi-cap funds: Schemes may have to majorly re-allocate holdings

Joseph Thomas, Head of Research at Emkay Wealth Management, also said that around Rs 35,000 crore will move out of largecaps to mid and smallcaps.

"This is definitely a welcome move, as good companies beyond 251st rank, will see new Rs 25,000 crore (Rs 10,000 crore already invested in smallcap companies) by January 2021," Amit Doshi, Investment Director at Care PMS, too, said.

The Sebi has done a categorisation of stocks in terms of market capitalisation. The top 100 companies in terms of market cap are largecaps, from 101 to 250th are midcaps and from 250th on are smallcaps.

"New Sebi guidelines will give a free hand to fund manager of multi-cap MF schemes (same size as largecap schemes-quite favourite amongst investors) to invest in good companies in smallcap basket," Doshi said.