MFs gear up to meet SEBI norm on classification

Some of the mutual fund houses are merging schemes and restricting inflows into small- and mid-cap funds even as they prepare to meet the new SEBI regulation on classification of schemes by end of this month.

In October, the regulator issued a circular directing the MFs to group their equity schemes under large-, mid- and small-caps based on market capitalisation of the stocks the scheme has invested.

For instance, an equity large-cap fund will consist of at least 80 per cent large-cap stocks defined as the top 100 companies in terms of market capitalisation. Similarly, mid-cap fund will have at least 65 per cent investment in mid-cap stocks that are ranked between 100 and 250 in market-cap, while small-caps would cover all other companies.

SEBI had given mutual funds time till December-end to prepare themselves for the new regulations and submit a report.

A Balasubramanian, CEO, Birla Sun Life Asset Management Company, said fund houses have to churn their portfolios and merge some of their schemes to meet the new norms.

“We ourselves have merged nine schemes in the last one year and will merge a couple more schemes to meet the new norms,” he added.

UTI Mutual Fund is also planning to merge a couple of its schemes to meet SEBI’s classification norms, said Leo Puri, Managing Director, UTI Mutual Fund.

The churning of portfolio will lead to investment of about ₹19,000 crore in mid-cap stocks at the cost of large- and small-caps, said an analyst.

Mirae Mutual Fund has restricted SIP investment in its Emerging Bluechip Fund only to the 10th of every month from December 15. Earlier the fund house had stopped accepting lump-sum investments into this scheme and capped SIP investments at ₹25,000 a month.

Swarup Mohanty, CEO, Mirae Asset Mutual Fund, said liquidity is a major concern in mid- and small-cap stocks and deploying the large fund flow into the scheme had become difficult.

Many small- and mid-cap-oriented funds have already put restrictions on lump sum inflows into their schemes. DSP BlackRock Microcap, IDFC Focused Equity and L&T Emerging Business are some schemes that have restricted lump sum investments in the recent past.

Fund houses are restricting inflows as they may be preparing the scheme for a merger to meet the new norms of the Securities and Exchange Board of India, even while the sharp run-up in mid-cap stock valuations remain a genuine concern, said a fund manager. Kalpen Parekh, President, DSP BlackRock Mutual Fund said new SIPs in DSP BlackRock Micro cap fund was stopped since February this year as it was becoming difficult to increase stock weightage of companies to a meaningful size in the portfolio.

The decision had some business impact as the fund accounted for over 60 per cent of SIP inflows. We have seen few other fund houses also limiting sales in select products, basis liquidity constraints, he said.

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