Your MF strategy after proposed SEBI changes

For the second consecutive day, we are seeing today that the broader market indices are beating the frontline indices. One of the reasons for such an asymmetrical gain is a recent announcement by SEBI, which has announced changes in the asset allocation of multi-cap schemes. The new structure will be implemented by January 2021 on the basis of SEBI list of stocks category (large/mid/small-cap) to be issued at the end of December 2020. According to the new structure, multi-cap schemes need to have at least 75 per cent of the total asset in equity and a minimum of 25 per cent of total assets in each of large-cap, mid-cap, and small-cap stocks.

Earlier, the fund managers were allowed to have a free hand on their asset allocation and could move to any category of stocks according to their perception of the market. Come January 2021 and this freedom will be lost.

Current status

At the end of August 2020, the multi-cap category had the second-highest asset under management among equity and stood at Rs 1.46 lakh crore, which increased from Rs 1.35 lakh crore at the end of the same month last year. On average, these schemes are holding more than 95 per cent of their assets in equity out of which, almost three fourth is in large-cap, followed by mid-cap (16 per cent) and small-cap (5.6 per cent).

What the future may hold?

Given the current structure, we assume that 50 per cent will still be held in large-cap stocks by multi-cap funds and we may also see Rs 36,500 crore of selling in large-cap. At the same time, to hold 25 per cent each in mid-cap and small-cap stocks, a buying of Rs 13,400 crore and Rs 28,800 crore is expected in these categories of stocks, respectively.

Many HNIs and retail investors pre-empting this move have started buying in small-cap and mid-cap stocks. Some of the major holdings in mid-cap space by multi-cap schemes are AU Small Finance, SRF, Ramco cement, Balkrishna Industries, BEL, TVS, Voltas, PFC, IPCA Labs, CESC, CG Consumer, REC, Page Industries, JSPL, ABFRL, Atul, ACC, and Bata. These companies may see a further increase in exposure. Among small-cap stocks like Vaibhav Global, Linde India, MCX, BEML, Kalpataru Power, BDL, Nippon Life, Strides Pharma, Century Textiles, VMart, EIH, Star Cement, Jyothy Labs, CDSL, JK Lakshmi, Justdial, VRL Logistics, Praj, Finolex, Camlin, Mahindra Logistics, KNR, OEL, GE T&D, EIL, Ashoka Buildcon, etc may see a buying.

To rebalance and comply with SEBI circular, we may even see selling in some of the weaker large-cap stocks.

For a mutual fund investor, you need not sell your multi-cap funds. Besides, if you have small-cap or mid-cap funds, you can continue with your investment and ride the recent rally. The industry body is making representation to the market regulators and we do not expect a major selling or buying in stocks purely due to the proposed changes. Therefore, you should continue with your investment and stick to your financial goals. If some of your investments in small-cap and mid-cap funds reach their goal early, you may shift funds to liquid funds.