Sebi says mutual funds can merge multi-cap schemes, or re-position under different category

Regulator clarifies that re-balancing portfolios not the only option before fund managers

The Securities and Exchange Board of India (Sebi) on September 13 clarified that multi-cap schemes need not necessarily churn their portfolios by selling largecap stocks or buying smallcaps in multi-cap schemes to meet the new norms, but can also exercise options such as merging schemes with largecap funds, re-positioning them as large- and midcap schemes, or facilitating unitholders' switch to another scheme.

The market regulator said that fund houses can use these options among other things and also added that it will examine if any proposals are submitted by the industry to meet desired objective of true-to-label and appropriate benchmarking.

In a release on September 13, Sebi said it was conscious of market stability and that is why it had given the industry time till January 31, 2021, to meet the new minimum limit norms pertaining to multi-cap funds.

"It is unlikely that Sebi will go back on its ruling on multi-cap funds. But Sebi has now given enough options to fund houses to deal with their existing multi-cap funds," says a senior executive of a fund house requesting anonymity.

Fund managers had pointed that NSE 500, which is a benchmark for multi-cap schemes, also had just about six percent weightage towards smallcap stocks and 14 percent to midcap stocks.

“The Sebi circular on multi-cap schemes is difficult to implement in current form. Sebi clarification helps, but merging or changing the scheme category might create its own set of problems. It is not an easy process and so unit-holders should still keep a close watch on how the developments pan out,” said Kirtan Shah, Chief Financial Planner at SRE.

On September 11, Sebi had said that multi-cap schemes should have a minimum 25 percent allocation each to largecaps, midcaps and smallcaps.

Sebi’s new norms had earlier built-up expectations that smallcaps could start to see a sharp rally as fund managers would now be forced to rotate large positions from multi-cap schemes to this segment of the market.

Meanwhile, there were also fears that large-cap stocks could correct as most multi-cap schemes had become largecap heavy. According to data from Morningstar, of the 35 multi-cap funds, 32 had over 50 percent allocation to largecap stocks. Of this, 28 schemes had between 65 percent and 92 percent largecap allocation as of August 31.

In its release on September 13, Sebi alluded to this large-cap bias in multi-cap schemes. “Multi-cap schemes had flexibility in terms of allocation to large-, mid- and smallcap stocks. However, it has recently been observed that some multi-cap schemes have skewed portfolios, with over 80 percent of investment in largecap stocks akin to largecap schemes, and some multi-cap schemes have near zero or insignificant asset allocation to smallcap companies,” Sebi stated.

“Considering the above, in order to achieve the objectives of true to label and appropriate benchmark, a need was felt to review the scheme characteristics of multi-cap schemes and take necessary steps to clearly distinguish multi-cap schemes from other category of schemes,” the release added.

A fund house official agreed with Sebi's stance that many multi-cap funds had in fact tilted their portfolios heavily towards largecaps. In 2017, when it categorised mutual funds and carved out multi-cap category as one of the categories, it did not specify how much such schemes would need to invest in large, mid and small sized firms, something which it ought to have done at the time, he added.