Updated: Jan 9, 2021
Abhishek sharing his point of view on the new norms as a panelist.
The New SEBI norms on Multicap Funds (SEBI circular dated 11th September, 2020)
The New SEBI circular on the structure of a multicap mutual fund recently released has raised eyebrows in the industry because it will result in the reallocation of investor funds in the multi-cap schemes according to laid down SEBI guidelines. SEBI says that all mutual funds schemes should be True to Label and Appropriate Benchmarking according to the circular and had prescribed the following amendments in these schemes marketcap allocation, viz., 25% each in Largecap, Midcap and Smallcap stocks and the balance 25% free to be deployed in any proportion to all or any of these marketcaps. What this means that the maximum allocation that any multicap fund will be able to invest in any of the three marketcaps is 50% where minimum being 25% for any individual marketcap under all circumstances.
Now the question arises as to why SEBI had to issue such directive to the mutual fund industry?
Here we need to reflect and what changes were brought about in the mutual funds and where do we stand in the mutual fund industry right now. SEBI came with Mutual Funds Scheme Categorization in the June 2017 where all the mutual fund schemes (Equity, Debt, Liquid, Others) across the industry were classified into 36 different fund categories in its entirety. This was done majorly to ascertain the scheme performance and comparison with respect to its benchmark or with respect to its industry peer schemes. Earlier than these guidelines, it was very difficult to be able to really compare apples to apples when the industry was comparing apples to oranges in the absence of standardised comparison norms. And as a result many investors were investing into similar schemes with identical portfolios in the absence of schemes standardization. To address such a lacuna, SEBI came up with the Mutual Funds Scheme Categorization Guidelines, 2017 which brought about industry-wise revamping of schemes in the light of these guidelines. It did brought about a great level of change in Mutual Funds but still there were many more scheme level changes to be incorporated over a period of time. This change happens to be one such change but why now is the question that everyone is asking, when there is COVID19 related lockdown and unlocking of the economy happening?
According to AMFI’s data, the present size of the Indian Mutual Fund industry is about 27 lakh crores and out of this the share of multicap funds is about 1.46 lakh crores distributed in about 35 different multicap schemes. Last couple of years has not augured well in terms of performance in the mutual fund industry and there has been other fund related shocks of late as well. This was further aggravated by the COVID19 pandemic followed by COVID19 related lockdown and the stock market crash in March this year which resulted into the distortion of funds distribution as there was flight to safety in many of these funds, i.e., many multicap schemes sold a sizable chunk of mid and smallcap stocks and increased the allocation to Largecap stocks experiencing volatility and uncertainty going forward. There were instances of multicap schemes being over invested in Largecap and underinvested in midcap and smallcap. This was not in accordance to the SEBI’s directive of being True to Label norms of scheme categorization and hence SEBI invoked such scheme level amendments.
Many media reported it quite adversely, that it will add to volatility in the market as these funds will be forced to sell Largecap stocks from these portfolios and the quantum of redemptions could be in the range of 40-50 thousand crores which is quite unlikely. This realignment will be to the tune of about 15 thousand crores or so to be done by January 31st, 2021. This will be mitigated by the ongoing SIPs/STPs in these funds along with fresh investments that may come through during this time. So we may not see widespread selloffs in the market because of these funds. All the more it will be more helpful in stabilizing broader markets with some bit of volatility over a short period of time.