The recent news from the Securities and Exchange Board of India (SEBI) has brought multi-cap funds into the limelight. SEBI announced new regulations for these types of investment products, setting specific limits on the size of their portfolio that could be invested in large, mid, and small-cap stocks. This change aimed at ensuring a balanced distribution of investments across all company sizes, primarily due to the observed bias towards large cap stocks in most multi-cap funds.
Understanding Multi-Cap Funds
A multi-cap fund invests in all three categories of companies by size: small, medium, and large-cap, thereby providing a diversified investment portfolio. The size of a company is usually determined by its market capitalization, which is the total value of a company based on its share price and the number of outstanding stocks.
Large-cap stocks belong to the top 100 listed companies with the highest market capitalization, while mid-cap stocks are owned by the next 150 companies (ranked 101 to 250). Small-cap refers to those companies who rank 251 and above in terms of market capitalization.
New Rules Imposed
SEBI has mandated that a multi-cap fund now needs to invest at least 75% of its total assets in equities or equity-related instruments, up from the previous threshold of 65%. Additionally, this 75% must be distributed among large, mid, and small-cap companies, with each category receiving a minimum of 25%. The remaining 25% is left to the discretion of the investors.
Previously, fund managers had the liberty to allocate investments across market capitalisation based on their preference. However, the revised guidelines aim to ensure better diversification.
The Reasoning Behind Changes
The primary motive behind these amendments is to ensure multi-cap funds hold true to their name. As of now, most of these funds exhibit a significant tilt towards large cap stocks, with 65% to 90% of their portfolio in such equities. The new regulation stipulates a more even distribution across all sizes of companies, effectively living up to the ‘multi-cap’ label.
The Potential Impact
These changes may bring a significant shift in the investment flow among different sizes of companies. Fund houses might have to curtail their exposure to bigcap stocks and divert more funds towards mid- and small-cap stocks. There is an estimation that this could result in up to Rs. 40,000 crore moving from largecap to broader market sectors, notably mid- and small-cap.
The SEBI’s revised guidelines on multi-cap funds give a clear message about diversification and a more balanced portfolio in this segment. It will be interesting to see how asset management companies adjust to these changes and how it affects the flow of investments in the market.