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Can you benefit from Sebi's new multicap fund norms? Here's what experts say


In a bid to boost the midcap and smallcap segments of the market, regulator Securities and Exchange Board of India (Sebi) unexpectedly tightened the investment norms for multicap funds on Friday evening. Under the new rules, these funds are now mandated to invest 25 per cent each in largecap, midcaps and smallcap stocks. Earlier, there were no such restrictions.

The move will force money managers to lower their exposure to largecaps and shift funds to the midcap and smallcap stocks, a move that could result in about Rs 35,000-40,000 crore shifting from largecaps to the broader market. Fund houses are required to comply with the new norms by January 31, 2021. The rush to add smallcaps and midcaps to multicap portfolios could result in a run-up in those share prices.

Here’s how top industry leaders offered their benefit analysis of the Sebi move.

Madhusudan Kela, MK Ventures (Twitter)

This is a fantastic move from Sebi and a truly defining moment for the multi-cap category funds. It will immensely help broaden the base of current MF holdings and give due recognition to a lot of deserving small and midcap companies. In a fast-growing country like India, this will help smaller size companies to tap equity markets for growth funding. A lot of small companies are trading at extremely cheap valuations compared to their true potential. Finally, this will bring enormous benefits to a lot of small investors who have been invested in smaller sized companies and holding them for long period in anticipation of true price discovery.

Joseph Thomas, Emkay Wealth Management

At present, the multi-cap funds have almost 70 % of their allocation to large-cap stocks and the balance to mid-cap and small-cap stocks. Due to new regulation, an amount equivalent to Rs 35,000 crore will move out of large caps and will move into mid and small caps. This move will help midcap and smallcap stocks to move up on the back of their share going up in terms of allocation.

Jean-Christophe Gougeon, Sharekhan

Currently, the multicap category of mutual fund scheme has assets under management of around Rs 1.4 trillion roughly, and the majority of the schemes have very low exposure to smallcap companies. This essentially means that most asset management companies will have to undertake major rebalancing of their portfolios to adhere to new regulations by January 2021. The fallout of the rebalancing by AMCs would be visible in equity markets with CNX Smallcap index likely to sharply outperform with buying interest from domestic institutions in the coming months. Consequently, the smallcap mutual fund schemes could be indirect gainers from the new guidelines by the regulator.

Harshad Chetanwala, MyWealthGrowth
Multicap funds are one of the biggest in terms of the number of schemes and AUM within equity diversified funds. These funds were preferred by investors because it offered flexibility to fund managers to invest across large, mid, and small-cap based on the opportunity. With a minimum of 25% allocation in smallcap, investors may decide to switch their investments into other categories like large, midcap or focused funds. There could also be a possibility of some fund houses shifting their multi-cap funds to other categories.





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