New Rules For Multi-cap Funds

As per the new condition, at least 75% of the assets in multi-cap funds need to be invested in equities all the time compared to 65% before.
New Rules For Multi-cap Funds
3 min
07-May-2024

The Securities and Exchange Board of India (SEBI) recently introduced new rules for multi-cap funds, aiming to enhance transparency and investor protection. In this article, we’ll delve into the SEBI guidelines for multi cap mutual funds changes, their implications, and provide guidance for investors.

Previous SEBI rules for multi-cap mutual funds

Before the recent changes, SEBI rules for multi-cap funds operated under certain guidelines. Let’s briefly recap what those were:

  1. Minimum allocation to equities: Previously, multi-cap funds were required to allocate a minimum of 65% of their assets to equities.
  2. Market capitalisation allocation: There were no specific rules regarding allocation across different market capitalizations (large-cap, mid-cap, and small-cap).

New SEBI rules for multi-cap funds

The revised SEBI guidelines for multi cap mutual funds introduce two significant changes:

1. Increased minimum allocation to equities

  • Old rule: Minimum 65% allocation to equities.
  • New rule: Minimum 75% allocation to equities.

This change aims to ensure that multi-cap funds maintain a higher exposure to equities, potentially benefiting investors during market upswings.

2. Defined minimum allocation in each market capitalisation

  • New rule: Multi-cap funds must now allocate a minimum percentage of their assets to each market capitalization category (large-cap, mid-cap, and small-cap).

Areas of concern highlighted by SEBI

SEBI’s clarification highlighted three key areas of concern:

  1. Lack of noteworthy diversification in most multi-cap funds: Some funds were heavily skewed towards specific stocks or sectors, compromising diversification.
  2. Divergence in scheme names and nature: Certain funds had names suggesting a particular investment style (e.g., “large-cap” or “mid-cap”), but their actual holdings didn’t align with these labels.
  3. Use of appropriate benchmarks: SEBI emphasised the importance of selecting relevant benchmarks for performance evaluation.

Fund houses’ responses after SEBI rules for multi-cap funds

Fund houses have responded to SEBI’s observations:

1. Counter argument: lack of noteworthy diversification

  • Some fund managers argue that diversification isn’t always about holding a large number of stocks. Concentrated portfolios can also deliver strong returns if well-researched.

2. Counter argument: divergence in scheme names

  • Fund houses contend that scheme names are marketing tools and don’t necessarily reflect the entire portfolio composition.

3. Counter argument: appropriate benchmarks

  • Fund managers assert that selecting benchmarks is subjective and depends on the fund’s investment strategy.

Implications of SEBI’s new rules

  1. Portfolio rebalancing: Fund managers will need to adjust their portfolios to meet the increased equity allocation requirement. This could lead to selling some existing holdings and buying more equities. Investors should be prepared for potential changes in their fund’s composition.
  2. Market capitalisation allocation: The new rule mandates a minimum allocation to each market capitalisation category. Fund managers will need to strike a balance between large-cap, mid-cap, and small-cap stocks. Investors should assess how this impacts the fund’s risk-return profile.
  3. Performance expectations: With higher equity exposure, multi-cap funds may experience greater volatility. Investors should align their expectations accordingly. Historically, multi-cap funds have provided a blend of growth and stability, but individual results can vary.
  4. Scheme renaming and communication: Fund houses may rename their schemes to better reflect their investment approach. Investors should pay attention to these changes and understand how they align with their own investment goals.
  5. Benchmark selection: Choosing appropriate benchmarks becomes crucial. Investors should evaluate whether the selected benchmark accurately represents the fund’s investment universe. A mismatch could lead to misleading performance comparisons.
  6. Investor behaviour: As the rules encourage more equity exposure, investors might react differently during market fluctuations. Some may become more risk-averse, while others may seek higher returns. Understanding your risk tolerance is essential.

Investor action steps

  1. Review your portfolio: Check if your existing multi-cap fund complies with the new rules. If not, consider rebalancing or switching to a fund that adheres to the guidelines.
  2. Understand fund strategies: Look beyond the fund’s name. Understand its investment philosophy, sector preferences, and historical performance. Does it align with your long-term goals?
  3. Risk assessment: Assess your risk appetite. Multi-cap funds can offer diversification, but they also carry market risks. Ensure your portfolio aligns with your risk tolerance.
  4. Stay informed: Keep track of fund updates, manager commentaries, and any further clarifications from SEBI. Being informed empowers you to make better investment decisions.

Remember, while regulatory changes can create short-term uncertainties, a well-thought-out investment strategy remains the key to long-term success. Consult a financial advisor if needed, and stay focused on your financial objectives. Incorporating multi-cap mutual funds into your investment strategy, either as a lump sum investment or a SIP investment, can be a versatile approach to achieve your comprehensive financial goals, according to the principles outlined in their respective key information memorandums.

Bottom line

The new SEBI guidelines for multi cap mutual funds aim to enhance investor protection and promote better fund management. Investors should stay informed and make informed decisions based on their risk tolerance and investment objectives. With the new SEBI guidelines for multi cap mutual funds it's essential to conduct thorough research or consult with a financial advisor to make the best decision for your financial future. Ensure that you invest in instruments offered by trusted Asset Management Companies (AMCs). Going through the Bajaj Finserv Mutual Fund Platform, which offers access to 1000+ mutual funds, makes it easier for investors to choose the right mutual funds hassle-free.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Frequently asked questions

What is the new rule for mutual fund investors?
The new rule mandates a minimum 75% allocation to equities in multi-cap funds.
What is the SEBI circular for multicap?
The SEBI circular defines the revised guidelines for multi-cap funds, including increased equity allocation and specific market capitalization requirements.
What are the major guidelines of SEBI for mutual funds?
SEBI emphasises diversification, appropriate benchmarks, and transparency in fund management.
Should I invest in multiple small-cap funds?
Consider your risk tolerance and overall portfolio diversification. Diversifying across different fund categories can be beneficial, but it depends on your individual financial goals.
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