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The Securities and Exchange Board of India (SEBI) regulates the mutual fund industry in India and constantly endeavors to make investments investor-friendly and transparent. While the regulator had already issued guidelines regarding the categorization of mutual fund schemes in the past, in its latest notification, SEBI has issued specific guidelines modifying the characteristics of a multi-cap mutual fund. Here is a quick look at what the guidelines say.

Multi-cap Funds

Multi-cap funds are equity mutual funds that invest in equity and equity-related instruments of large-cap, midcap, and small-cap companies. Until now, a multi-cap fund was required to invest at least 65% of its investible corpus in stocks of large, mid, and small-cap stocks. However, the ratio in which the fund manager needs to invest across different market caps was not defined.

New Guidelines

In its latest notification, SEBI has defined multi-cap funds as:

Equity mutual funds that invest at least 75% of its assets in equity and equity-related instruments of large-cap, midcap, and small-cap companies in the following manner:

  • Equity and equity-related instruments of large-cap companies – 25%
  • Equity and equity-related instruments of mid-cap companies – 25%
  • Equity and equity-related instruments of small-cap companies – 25%

Further, all multi-cap funds will be required to adhere to these provisions within 30 days from the date on which the Association of Mutual Funds in India (AMFI) publishes the next list of stocks or by January 2021. The definition of large, mid, and small cap companies is as follows:

  • Company #1 – 100 in the list of companies sorted as per market capitalization – Large-Cap companies 
  • Company #101 – 250 in the list of companies sorted as per market capitalization – Mid-Cap companies
  • Company #251 onwards in the list of companies sorted as per market capitalization – Small-Cap companies

This move will ensure that multi-cap funds offer pure diversification.

How Can This Change Affect You?

There are different views with respect to this move by the regulator. Experts believe that while some fund managers might approach the regulator to relook at the changes, some others could apply for reclassifying their existing multi-cap funds under another category. For investors, this could mean having an option to invest in a purely diversified portfolio. 

Most multi-cap schemes were more like large-cap funds with a small exposure to small and mid-cap stocks. With these changes, multi-cap funds would be evenly invested across all market capitalizations. One of the primary changes for an investor would be the increase in risk exposure of these funds. At the same time, an increase in exposure to mid and small-cap stocks would increase the chances of earning good returns. Until now, many investors purchased multi-cap funds as a diversified alternative to large-cap funds. With these changes, that will no longer be possible. Also, the ability of the fund manager to optimize returns in the mid and small-cap segments will play a crucial role in determining the returns of the fund. Investors will do well if they reanalyze their equity investments and ensure that the exposure across market capitalizations is as desired.

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