What are the new rules issued by SEBI for multi-cap funds? What will be the impact?

SEBI has actually tweaked the definition of multi-cap schemes, which is an important category of equity mutual funds offered. While the intent is to tweak the asset class mix of multi-cap funds, it could trigger a major churn in holdings in many of these funds.

Firstly, SEBI has enhanced the minimum investment threshold in equity and equity-related instruments to 75%. It used to be 65% earlier. That takes away the asset allocation leeway that fund managers had in terms of dynamically allocating across asset classes.

But the real issue is that SEBI has now mandated that at least 25% of the corpus of the multi-cap fund should be distributed across large-caps, mid-caps and small-caps. Here again, this move takes away the flexibility and may also force a major portfolio churn.

SEBI observed that multi-cap funds were getting skewed towards large caps and hence their performance was almost at par with large cap funds. Currently, there are 35 multi cap funds active in India and their total AUM totals to Rs.147,000 crore, which is substantial.

Currently, the mix is 65:17:9 spread across large caps, mid caps and small caps, with the balance in debt and cash. Clearly, this new rule will lead to a major shift of multi cap portfolios out of large caps and into mid caps and small caps in a big way.

The only concern is that this move could distort asset allocation as the mid cap and small cap universe may not have the capacity to absorb such large flows. Some optimists are also betting on a small cap and mid cap rally as a result of this move.