Multicap funds: Mutual Funds seek more time to comply with Sebi fiat

Fund houses are planning to submit representations to Sebi on asset allocation norms for multicap funds. Sources in the mutual fund industry said they would seek 10-12 months to comply with the latest circular and reduce the minimum investments from 25% to 10% in smallcap stocks.

Mutual Funds have been given time till January 31, 2021, to comply with the latest circular that mandates multicap schemes to invest a minimum of 25% each in large, mid, and smallcap stocks, with the balance 25% giving flexibility to the fund manager. However, this announcement has come as a surprise to the industry as the broader industry view is that 25% of investments in smallcap stocks would further create risks for investors.

“It will be very difficult for funds with high assets size to reallocate from largecap to smallcap stocks in the next four months. We will recommend the regulators to give us more time to comply with the circular. Even the criteria for minimum of 25% of investments should be brought down to 10% while buying the smallcap stocks,” said a fund manager from a leading fund house on condition of anonymity.

On Sunday, Sebi said mutual funds would have several options to meet with the requirements of the circular, based on the preference of their unit holders. Apart from rebalancing their portfolio in the multicap schemes, fund houses can facilitate switch to other schemes by unit holders, merge their multicap scheme with their largecap scheme or convert their multicap scheme to another scheme category.

Market participants said the clarification from the regulator is welcome, but they will wait for more changes in the circular before deciding the future course of action. “It will be difficult to invest as announced in the circular. While the point of regulator regarding being “true to label” in multicap schemes is well taken, the current high exposure in largecap stocks is because fund managers are not finding enough opportunity in the smallcap stocks,” said the CEO of a mid-size fund house.

Multicap schemes had net assets of Rs 1.46 lakh crore under management as of August 2020. These funds had the flexibility to invest in largecap, midcap and smallcap stocks. But the regulator observed that some multicap schemes had skewed portfolios, with over 80% of investment in largecap stocks akin to largecap schemes, and some multicap schemes have near zero or insignificant asset allocation to smallcap companies.

Mutual fund industry says that if there are no further changes in the circular and if all the fund houses follow the changes in the asset allocation of multicap schemes, around Rs 35,000-40,000 crore will move into mid and smallcap stocks.

The Association of Mutual Funds in India said that the industry body would gather feedback from members and go back to the regulator for non-disruptive execution of multicap funds portfolio balancing.