InvestorQ : What is the gist of the announcement that SEBI has made pertaining to multi cap funds in India?
diksha shah made post

What is the gist of the announcement that SEBI has made pertaining to multi cap funds in India?

Rashi Mehra answered.
2 years ago

During the week, on the 11th of September, SEBI announced some very important changes to the portfolio mix and composition of multi-cap funds. Essentially, these multi cap funds are a combination of large cap, mid cap and small caps to give the best of diversification. Here is the gist of what SEBI announced.

· SEBI, the regulator for capital markets, has now made it mandatory for multi-cap funds to have at least 75% exposure to equity and equity related instruments.

· This is a departure from the old stipulation wherein only 65% minimum had to be maintained in equities giving the manager a lot more leeway

· This equity base enhancement to 75% takes away the freedom that many multi cap managers enjoyed with respect to parking funds temporarily in debt and liquid assets.

· In a significant step, SEBI is has decided to have a more micro assessment of the mix between large caps, mid caps and small caps as most multi caps were like large caps.

· Now SEBI has mandated that 25% of the allocation of multi-cap funds must be to large caps, mid caps and small caps respectively at the bare minimum

· This reduces the freeway for non-equity assets to just about 25% of the total asset mix and that could be a liability in weak market conditions.

· This also means that large caps now cannot be more than 40% on an average because 50% will go away in small caps and mid caps and around 10% in liquid assets

· Multi-cap funds are currently having exposure to large caps in the range of 70% to 80%. So, the big shift could be selling in large caps and buying in mid and small caps

· The estimate is that a total of Rs.40,000 crore will flow out of large caps of which Rs.15,000 crore would flow into mid caps and Rs.25,000 caps into small caps

The only challenge it does raise is one of liquidity in small and mid cap stocks to be able to soak so much of liquidity.