Sebi, MFs to discuss multi-caps’ rejig

Mumbai: Markets regulator Sebi on Sunday evening said it was open to discussions with the mutual fund (MF) industry for a smooth transition for multi-cap funds to rejig their portfolio so that these schemes “achieve the desired objective of true to label and appropriate benchmarking”.

The market regulator’s clarification came on the back of its Friday order that said, by January 2021, all multi-cap funds should have at least 75% of its corpus in equities — up from 65% earlier — to be equally invested in large-, mid- and small-cap stocks.

Sebi’s Friday directive had sent the fund industry into action as they were weighing various options to comply with the new rule. These included merging existing well-performing funds with another, which could have hurt investor interest, and then launching another fund in the multi-cap space that would be in line with the regulatory directives. The other option that officials at fund houses considered was to merge small-cap funds with multi-caps.


According to an analysis by domestic financial services house Edelweiss, 35 multi-cap funds are currently managing assets worth nearly Rs 1.5 lakh crore. Of the total assets, about 65% is invested in large-cap stocks, 16-18% in mid-caps, 8-9% in small-caps and the balance in cash. So in about four and half months, around Rs 12,000 crore should be shifted from large-caps to mid-caps and about Rs 24,000 crore from large caps to small caps. This translates into about Rs 300 crore worth of transfers daily, from large-caps to mid- and small-caps combined.

In the stock trading space, market experts saw huge rush for small- and mid-cap stocks — a fallout of the Sebi order. They said, knowing well that multi-cap fund managers will be forced to buy small- and mid-cap stocks before the January deadline, a section of traders and investors are expected to front-run these stocks now and sell these at profit, when the fund managers come in to buy.

Sebi’s directive would “lead to forced inflows into mid- and small-caps over the next four months, especially small-caps, given the sizeable gap between existing and proposed holdings across most schemes”, an HDFC Securities report said. However, Sebi’s clarification is now expected to limit such a rush for these stocks in coming weeks, market players said.

On Saturday, industry body Amfi’s chairman and Kotak Mutual Fund MD Nilesh Shah had said on an investor call that the fund house “will explore all options to ensure that its time-tested and successful investment process is carried forward with minimum disturbance.” Kotak MF’s Standard Multi-cap, with a corpus of about Rs 29,700 crore, is the largest multi-cap fund in the country.

Some of the options that Kotak MF could have considered included returning money to clients, requesting for a switch to other equity funds with the help of partners, merging multi-cap fund with large-cap or large- and mid-cap fund to maintain investment process and portfolio quality, and converting multi-cap fund to thematic fund like ESG (environmental, social and governance) fund for the same reason. Several other fund houses were also considering such options, industry officials said. These considerations, however, are now expected to be delayed after the Sebi clarification. They could even be completely shelved if something positive comes out of consultations between Sebi and the fund houses, they said.