How SEBI’s Multicap MF asset allocation rules will affect investors

Published: September 11, 2020 at 7:43 pm

In a circular dated Sep 11th 2020, SEBI has modified asset allocation rules for multicap mutual funds. We discuss how this rule is unnecessary and is likely to affect investors.

The initial scheme categorization circular issued in OCt 2017 only wanted a multicap fund to maintain 65% equity exposure with no other regulation on market cap allocation. Now SEBI has modified the asset allocation rules “in order to diversify the underlying investments of Multi-Cap Funds across the large, mid and smallcap companies and be true to label”

Now there will be a minimum 75% equity exposure with 25% in large cap (top 100 stocks in terms of market cap), 25% mid cap stocks (101st to 250th) and 25% small cap stocks (25st and below).

Mutual funds have time until Feb 2021 to comply with this rule. Although there is no immediate disruption, this rule will make multicap mutual funds significantly more volatile. On the other hand, singular cases of outperformance, that is one fund alone doing better than the rest, will reduce. So it is definitely a good move for potential future investors in the multicap space.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    Large Cap Allocation in Multicap Fund (Aug end 2020)

    Scheme NameAllocation (%)
    Axis Multicap Fund92.3
    Motilal Oswal Multicap 35 Fund88.9
    JM Multicap Fund88.1
    HDFC Equity Fund85.9
    Taurus Starshare (Multi Cap) Fund82.8
    Sundaram Equity Fund79.8
    BNP Paribas Multi Cap Fund78.7
    Franklin India Equity Fund78.1
    ITI Multi-Cap Fund77.7
    Kotak Standard Multicap Fund77.7
    HSBC Multi Cap Equity Fund76.9
    Essel Multi Cap Fund75.3
    ICICI Pru Multicap Fund75.0
    Canara Rob Equity Diver Fund74.6
    Edelweiss Multi-Cap Fund73.9
    Baroda Multi Cap Fund73.5
    L&T Equity Fund73.0
    SBI Magnum Multicap Fund72.9
    Union Multi Cap Fund72.7
    Shriram Multicap Fund71.4
    DSP Equity Fund70.1
    LIC MF Multi Cap Fund70.0
    Principal Multi Cap Growth Fund69.9
    Mahindra Manulife Multi Cap Badhat Yojana69.0
    Aditya Birla SL Equity Fund68.2
    IDBI Diversified Equity Fund68.0
    Tata Multicap Fund67.8
    UTI Equity Fund65.8
    PGIM India Diversified Equity Fund62.1
    IDFC Multi Cap Fund53.4
    Nippon India Multi Cap Fund53.1
    BOI AXA Multi Cap Fund46.4
    Invesco India Multicap Fund35.2
    Parag Parikh Long Term Equity Fund34.9
    Quant Active Fund18.0

    Except for a few mutual funds, most of them are essentially large cap funds. Superficially it is easier to argue that a multi-cap fund should have equal representation across the market cap. However, if we restrict the fund managers ability to change cap weights we guarantee higher risk and also lower potential reward.

    SEBI could have set the minimum exposure to 10% to each segment and leave the rest to the fund managers discretion. A fund can invest a maximum of 90-95% in equity. So with a minimum 25% exposure in each segment, the fund manager only has the freedom to the extent of 15-20% (much less if cash calls are made) to change the cap weights.

    This is not bad for a new investor (they would get used to this from day one) but it would certainly be a “new normal” for existing multicap investors. Additionally, funds with large AUM will find compliance difficult. They may switch avatars to become large and midcap funds. A fund like Parag Parikh should be able to adjust to this, in my opinion.

    AUM of multicap mutual funds (Aug-end 2020)

    Scheme NameAUM(Cr)
    Kotak Standard Multicap Fund(G)29714.07
    HDFC Equity Fund(G)19797.98
    Motilal Oswal Multicap 35 Fund-Reg(G)11239.87
    Aditya Birla SL Equity Fund(G)11023.35
    UTI Equity Fund-Reg(D)10982.95
    SBI Magnum Multicap Fund-Reg(G)9063.31
    Franklin India Equity Fund(G)8591.33
    Nippon India Multi Cap Fund(G)8053.29
    Axis Multicap Fund-Reg(G)6434.07
    ICICI Pru Multicap Fund(G)5593.74
    IDFC Multi Cap Fund-Reg(G)4847.02
    Parag Parikh Long Term Equity Fund-Reg(G)4508.14
    DSP Equity Fund-Reg(D)3725.93
    L&T Equity Fund-Reg(G)2366.46
    Canara Rob Equity Diver Fund-Reg(G)2280.01
    Tata Multicap Fund-Reg(G)1694.77
    Invesco India Multicap Fund(G)924.83
    Baroda Multi Cap Fund(G)825.16
    Principal Multi Cap Growth Fund(G)653.54
    Sundaram Equity Fund-Reg(G)600.31
    Edelweiss Multi-Cap Fund-Reg(G)559.97
    BNP Paribas Multi Cap Fund(G)555.01
    Union Multi Cap Fund-Reg(G)370.74
    Mahindra Manulife Multi Cap Badhat Yojana-Reg(G)340.20
    HSBC Multi Cap Equity Fund(G)330.26
    LIC MF Multi Cap Fund(G)294.78
    IDBI Diversified Equity Fund(G)289.51
    PGIM India Diversified Equity Fund-Reg(G)225.60
    Taurus Starshare (Multi Cap) Fund-Reg(G)200.17
    Essel Multi Cap Fund-Reg(G)176.42
    ITI Multi-Cap Fund-Reg(G)134.42
    JM Multicap Fund(G)130.88
    Shriram Multicap Fund-Reg(G)58.47
    BOI AXA Multi Cap Fund-Reg(G)40.28
    Quant Active Fund(G)35.80

    Take Kotak Standard Multicap. If the fund manager needs to shift 25% of its AUM to small caps, it would amount to Rs. 7400 Crores. Currently, only HDFC Small Cap Fund and Nippon Indian Small Cap funds have a higher AUM in that segment!

    It would be best if Kotak AMC changes the fundamental attribute of the scheme. Similar arguments would apply to other heavyweights like HDFC Equity or any fund with Rs. 10,000 Crores or more. Whether they choose to change type or not remains to be seen though.

    Experienced investors know that as the AUM of a fund increases, the fund manager tends to go heavy on large caps. The reason for this is their higher liquidity and ability to handle sudden in or outflows. Existing multicap fund investors need not panic. Please wait for clarity from the fund house.

    In summary, existing multicap investors must brace for higher volatility and extended periods of poor returns if the mid and small cap segments alone underperform. Diversification comes with a price!

    Do share this article with your friends using the buttons below.

    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!

      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)