Should investors exit multicap mutual funds after new SEBI rule?

Published: September 14, 2020 at 10:22 am

Last Updated on September 14, 2020 at 12:36 pm

SEBI was forced to release a press release on 14th Sep 2020 after its Sep 11th circular change in multicap fund asset allocation caused concern about fall in large caps in the coming days. SEBIs unnecessary change has lead investors to ask if they should consider an exit from multicap mutual funds.

The Sep 14th press release does not help calm investor nerves in any way. SEBI remained defiant in its justification for mandating 25% minimum exposure to 25% in large cap (top 100 stocks in terms of market cap), 25% mid cap stocks (101st to 250th) and 25% small cap stocks (25th and below).

It has only clarified something well known to AMCs – instead of rebalancing an existing mutual fund portfolio by selling large cap stocks and buying more of mid caps and small caps (not immediately but by Feb 2021), fund houses could (1) merge their multicap funds with other funds (2) change category or (3) allow investors to switch funds without load.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

All this does not change the fact that SEBI’s sudden rule change three years after it was originally announced does not help unitholders in any way. SEBI must appreciate that many investors do not mind if their multicap funds are large cap heavy with the freedom to change the allocation at will. A multicap fund with a large helping of large caps, a dollop of mid cap caps and a pinch of small caps are what would keep most investors calm regardless of market conditions.

A 25% mid cap and small cap allocation at all times will make funds extremely volatile and unwieldy as explained before: How SEBI’s Multicap MF asset allocation rules will affect investors. It could also necessitate inflow closure depending on market valuation to protect existing unitholder interests.

SEBI’s press release has this baffling statement: “Multi Cap schemes had flexibility in terms of allocation to Large, Mid and Small Cap stocks. However, it has recently been observed that some Multi Cap Schemes have skewed portfolios, with over 80% of investment in large cap stocks akin to Large Cap schemes, and some Multi Cap schemes have near zero or insignificant asset allocation to small cap companies”

SEBI definition of “flexibility” is arbitrary. If the regulator thought it important that these funds “should have smallcap exposure” then why allow this “flexibility” three years ago? Why wait so long for investors to get used to the new scheme categories, introduce an arbitrary limit and then post a release saying they do not want to create disruption in the markets!

SEBI has done what a regulator should never do – cause investors confusion and worry. Yes they have given fund houses enough time to comply but with social media frenzy on even trivial matters, it only increases investor stress. The scheme categorization rules were far from perfect from day one. Arbitrary changes like this only make things worse. A 10% allocation to small caps at times is significant enough and would have not caused this much confusion.

Should investors exit multicap mutual funds?

Fund houses value AUM. So they would do everything in their power to ensure investors stay put. You can expect large multicap funds to change category. First, they are likely to appeal to SEBI. If that does not work, they will either comply or change category. Either way, once the compliance circular is published a time window of one month would be given to exit without load. Therefore investors should wait at least until the circular to make a decision. There is no need to act in haste now.

Many investors are worried if this circular would affect ELSS mutual funds and other categories. It will not. Also, investors in Parag Parikh Long Term Equity Fund have wondered about its fate. As mentioned my Sep 202o portfolio update (see video linked below) this fund occupies 44% of my retirement portfolio.

If the fund house remains a multicap fund, mid cap and small cap allocations would increase by about 10% each (as per Aug factsheet) and large cap and international equity allocation would see a corresponding decrease. This will increase fund volatility. At my age and retirement planning stage, that might not be acceptable. So at the very least, if the fund remains a multicap (assuming the 25% ruling stays) I will have to reduce exposure. A younger investor need not do this.

In summary, please take a case-by-case decision. There is no hurry. Maybe SEBI could modify the rule or AMCs could protect unitholder interests by changing category.

O, that a man might know
The end of this day’s business ere it come!
But it sufficeth that the day will end,
And then the end is known. – Julius Caesar Act 5 Scene 1

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

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • 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.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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 3,000 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 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 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 the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We 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, as well as teaching 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 is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the 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 with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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 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)