SEBI elucidates on rejig of multi-cap funds portfolios

Securities & Exchange Board of India (SEBI) came up with a change in the mandate for multi-cap funds via a circular dated September 11, 2020. The changed mandate dictated that, at all times, multi-cap funds need to hold a minimum of 25 per cent each in large-cap, mid-cap, and small-cap stocks.

According to SEBI, this change was made to ensure that the funds are ‘true to its label’. However, this created a lot of confusion among the investors’ community as to what is going to happen next as this change would indeed make multi-cap funds much riskier. Further, many fund houses were also looking at options to minimise the impact on its unitholders.

Many such options came out such as shifting to another category such as large-cap, mid-cap, or even to thematic funds. This can be done by either merging or creating a new fund altogether. Further, the industry body, Association of Mutual Funds in India (AMFI) had also considered a proposal to have a different category such as Flexi-cap.

Therefore, in order to address the confusion, the stock market regulator elucidated that the fund doesn’t have only one option of rejigging its portfolio. Rather, they have several options like merging multi-cap schemes or repositioning them under a different category. Thus, it is amply clear what a mutual fund can do and SEBI, for sure, will not go back on its ruling.

Hence, it is more likely that the fund houses would take the route of merging with other large-cap or mid-cap or even focussed funds or they might reposition themselves in another category. So, in short, what the stock market investors were expecting is not going to happen. Multi-cap funds are not likely to sell large-cap stocks and buy mid or small-cap stocks in order to reposition as per the mandate.