On September 11, SEBI surprised the MF industry by tweaking the definition of multi cap funds. The market regulator has asked fund houses to invest at least 25% each in large caps, mid-caps and small caps in their multi cap funds.
Many industry experts believe that the multi cap fund category was one category where the fund managers enjoyed the flexibility in stock selection and had an opportunity to show their true mettle. But the new rules on multi cap funds would shrink their elbow space.
Dhirendra Kumar, CEO at Value Research termed these regulations ‘puzzling’ in a tweet. He tweeted, “It is hard to understand what benefit this (the new rules) will bring or what harm it will prevent. In fact, forcing fund managers to compulsorily sell big quantities of large-cap stocks and buy small cap stocks will harm investors' interests. Why is SEBI doing this? What benefit will this sudden micromanagement of investment strategies bring for investors?”
Further, some fund managers also argued that after the changes in the multi cap fund’s mandate, Nifty or BSE 500 are not the true representative.
Rajeev Thakkar, CIO, PPFAS Mutual Fund, who manages one of the top performing multi cap funds - Parag Parikh Long Term Equity Fund - said that most multi cap funds are benchmarked to either Nifty or BSE 500. And the weightage of market cap of large, mid and small caps in these indices are tilted in favour of large cap. While the NIFTY 100 Index represents about 76.8% of the free float market capitalization, the NIFTY Midcap 150 Index represents about 12.9% and small caps the remaining 10%.
Rajeev tweeted that in any multi cap strategy most portfolios would have larger tilts toward the bigger companies. That is the nature of the market. If portfolios are to have large, mid and small caps in more or less equal proportions, the Nifty 500 and BSE may not be very representative. Also, the risk profile of such portfolios will be very different from the current one.
Way Forward
Vinit Sambre, Head-Equities, DSP MF feels that large multi cap schemes will find it challenging to accumulate good small cap stocks to rebalance their portfolio. But the good thing is that rebalancing is not the only option available for fund houses.
SEBI has clarified that rebalancing the portfolio in the multi cap schemes is not the only option for mutual funds. Fund houses can also facilitate switch to other schemes by unitholders, merge their multi cap scheme with their large cap scheme or convert their multi cap scheme to another scheme category, for instance large and mid-cap scheme category.
In this regard, industry sources told Cafemutual that fund houses have proposed SEBI to introduce a new category called ‘Flexi Cap’ where the fund manager can pick stocks at his discretion. This means the category could hold up to 100% large/mid/small cap as per the fund manager’s conviction.
In fact, Kotak MF, which runs the largest multi cap scheme, has reportedly said in its investor conference that they would approach SEBI to create a 'flexi cap' category.
Another option could be to convert the current multi cap scheme to a thematic fund like ESG. This would result in minor changes to the current construct of the portfolio. The fund house also assured investors that they would also seek an extension of the timeline to comply with the new multi cap fund requirements to ensure a smooth transition.
However, a few experts offer a different solution. A Mumbai distributor requesting anonymity is of the view that investors should invest in ELSS if they wish to take exposure to multi cap funds. “ELSS and multi cap funds are one and the same thing. Both the fund categories are allowed to invest across market capitalization. However, since multi cap funds will have to follow new exposure norms, investors can consider investing in ELSS to get benefits of tax advantage and multi cap flavor.
