As SEBI tweaks investing norms for multi-cap funds, ₹25,000-crore windfall coming for small/mid-caps

In a move aimed at making investments broadbased for mutual fund managers, SEBI has asked multi-cap funds to invest at least 25 per cent in small-cap shares and a similar percentage each in large- and mid-cap stocks. The market regulator has also raised the overall equity exposure limit of multi-cap funds to 75 per cent from 65 per cent at present.

Until now there was no individual cap across sectors, which meant that most multi fund managers were investing more into large-cap stocks. SEBI’s new diktat will force these managers to identify growth opportunities in mid- and small-cap sectors, leading to additional investments of ₹20,000-25,000 crore in these stocks.

Given the assets under management of multi-cap funds at ₹1.46-lakh crore, an investment of ₹36,000 crore each needs to be compulsorily made in mid- and small-caps. The additional investments of ₹20,000-25,000 crore is after taking into account the investments already made in these segments.

The new asset-allocation norms will have to be complied with by February 2021.

Multi-cap funds are most diversified equity mutual funds, which can invest in stocks across market capitalisation. They maintain an extensively diversified portfolio consisting of stocks of different marketcap. However, most multi-cap funds are heavily loaded with large- and mid-caps as they find little growth opportunity in small-cap stocks.

Concentration in a few stocks

Sorbh Gupta, Associate Fund Manager (Equity), Quantum Asset Management Company, said about 40 per cent of the entire mutual funds’ equity investment of ₹7-8 lakh crore is concentrated in top 5-6 market-cap stocks such as Reliance Industries, HDFC Bank, HDFC, ICICI Bank, Tata Consultancy and Infosys.

This is a huge concentration risk for investors who are shelling out a fee of about 2.5 per cent for an actively managed fund instead of parking money in an Exchange Traded Fund, which charges about 0.75 per cent, he said.

Moreover, without investing in these top stocks, it will be extremely difficult for a fund manager to beat the fund’s benchmark index, which is heavily loaded on these stocks, he added.

Sayalee Khandke, Manager Research, Investica, an online platform to invest in mutual funds, said fund managers earlier had the discretion to go overweight on stocks of any market cap but the proposed individual limit across large-, mid- and small-caps will make multi-cap funds true to their label and comparable with each other.

“We believe that this will help investors select the fund purely based on a fund manager’s calibre to navigate the market while being invested in stocks across market-cap,” he said.

Sunil Singhania, Founder of Abakkus Asset Manager LLP, said, “By their very name ‘multi-cap’, these funds should have exposure to stocks across market caps. However, most funds were mostly in large-caps even in multi-cap funds, thereby not following the mandate of the fund. This is a good move and will ensure that investors investing in multi-cap funds also get exposure to a basket of multi-market-cap stocks.”