SEBI Modifies Multi-cap Fund Classification

What happens when a regulator tries to over regulate? This happens.

Source: Moneycontrol

BSE small-cap is up 4%. The reason? SEBI released a circular on September 11, 2020 requiring all multi-cap funds to hold at least 25% of total assets in large-cap, mid-cap and small-cap companies. It feels a bit weird to have this kind of limitation on a multi-cap fund. If 25% of assets are invested in small-cap companies, it will drive up the investment in the small-caps. It will basically drive up the prices of small-caps.


Why was this decision taken?

SEBI released a clarification on September 13, 2020 as to why this decision was taken. Apparently it is because SEBI has observed that some multi-caps are holding up to 80% of the assets in large caps. There is already a large-cap category for schemes holding in this pattern. SEBI wants schemes to follow a true to label pattern. So if a scheme is labelled multi-cap it better invest across them.


I can understand why a scheme should stick to the label. But one can hardly make such a strict requirement of 25% in small caps. Small-caps account for only a small portion of the investable universe. A 25% investment will mean a large diversion from large cap to small cap.


What should investors do?

Some investors could be speculating if this requirement will force the multi-cap mutual funds to move a large portion of their assets from large cap to small cap. Their speculation may have encouraged them to invest more into small caps and thus driving the BSE small cap up by 4% today. I don’t know. I am just speculating.


As usual, I still say the same thing. Don’t worry about any of this. Continue to invest according to your asset allocation. I am pretty sure SEBI will relax the rules. Alternatively, fund houses will merge or re-classify their schemes. There is time till January 31, 2021 and many things can change. Whatever happens, don’t speculate and invest into small caps today hoping that the price will go up in future.


Conclusion

I did not like the decision taken by SEBI in this regard. However, I do think the requirements will be relaxed. More importantly, I am sure fund houses will not just sell large caps and invest in small caps just because of this decision. There is a reason they chose to invest heavily in large-caps. Finally don’t speculate on small-cap’s rally. It may have gone up today, but I doubt it will continue.


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