Multicap Funds, a source of multiple interpretations?

Last week end SEBI announced a small clarification on how the portfolio construct should be in Multicap Funds i.e as the name suggests it must have a fair representation of Large Cap stocks, Midcap Stocks & Small Cap Stocks.. that is it defined that each of these categories must have a minimum of not less than 25% representation in the fund.

Why was this brought about ?

As Multicap funds grow in size, with performance and risk being two sides of the portfolio management construct, funds have chosen to move more towards Large Cap stocks and lesser in terms of Mid & Small Cap stocks. The reason being that predominantly the last few years large caps have done much better than mid & Small Caps as also the aspect that there is a problem in liquidity esp in small cap space if you are a reasonably large fund. So within multicap category you had funds which have almost 80 % invested in large cap and you also have funds which have significantly lower amounts invested in large caps and well spread out across the categories. This does not allow for apple to apple comparison on performance measures between funds, something that SEBI has been pushing for since 2018 during the scheme reorganization process.

What’s the Hullabaloo about ?

Ever since this announcement was made by SEBI last week, Stock traders have been rejoicing that over 40,000 Crores of monies would have to move from large cap stocks to midcaps and small caps and hence they are all planning to load up on mid & Small cap stocks so that when the Mutual funds start reorganizing their portfolios they would be able to make a quick bundle by selling their small cap portfolio at a significant gain. In theory it does seem a no brainer. In fact the number of people investing in Small Cap Mutual Funds itself has gone up on Monday i.e., 14th Sept, leading to a 4% jump in the small cap index. However for these quick money seekers, this could well be a huge loss making proposition. Let me explain why?

SEBI has late on Sunday clarified that while they would like Multicaps to have the desired asset allocation i.e., 25% each across each categories. They have offered a wide variety of options including a possible extension of timelines to make this happen. So I dare say that the quick money that someone had hoped for may just take a little longer. A few funds with a large portfolio may actually again categorize their fund as a flexicap to protect the investors returns thus far.

So in a nutshell it will be an interesting space to watch how things pan out ? However we are pretty confident that all the outcomes will be in the best interest of investors.

So our advise is investors must not do anything in haste and wait and take a action if needed when more clarity emerges.

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