The Securities and Exchange Board of India’s (Sebi) September 11 circular asking multi-cap funds to have a minimum allocation of 25 per cent each to large-cap, mid-cap, and small-cap stocks will change the risk and return profile of these funds significantly.
Sanjay Kumar Singh, Business Standard
Through a subsequent circular, Sebi has said that fund houses may comply either by switching their unitholders to another category, merging their multi-cap fund with a category such as large-cap, or converting their multi-cap scheme into another, such as large- and mid-cap. For the present, wait for your fund house to decide which of these courses it will take. Only then decide whether you should continue with the fund or exit it.
Funds should be true-to-label
Sebi wants all funds to be true-to-label. A multi-cap fund, in its view, should have an allocation to all the three market-cap categories. That way, when even an uneducated investor buys these funds, he gets what the name “multi-cap” suggests.
Moderately aggressive funds
Most multi-cap funds have so far been run as large-cap plus kind of funds. “Most of them had a 70:30 (70 per cent exposure to large-caps and 30 per cent to mid- and small-caps) or 65:35 kind of exposure,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India. Investors who were willing to take slightly more risk than in pure large-caps, but lacked the appetite to invest in pure mid- and small-cap funds, opted for them.
Multi-cap funds were not promoted as aggressive funds. Most had internal mandates whereby they would not reduce their large-cap allocation below 65-70 per cent. Only a couple of funds in this category had a 50 per cent allocation to large-caps and 50 per cent to mid- and small- caps.
In their earlier avatar, they were go-anywhere funds. “If better opportunities were available in the large-cap space, as has been the case over the past two years, they would tilt their portfolios in that direction. And if the opportunities were better in the mid- and small-cap space, they would raise allocation to that space, say, up to 30-40 per cent.
That is how they earned sound returns and reduced downside risk,” says Vidya Bala, co-founder, Primeinvestor.in. The allocation to mid- and small-caps helped these funds outperform the large-cap category (see table).
Risk-return profile will change
In the near future, if due to the Sebi circular the mid- and small-cap allocation of these funds has to be raised to 50 per cent, the risk-return profile of most of them will change significantly. “The new multi-cap fund will have a higher capacity for alpha generation but it will also be riskier,” says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund.
That go-anywhere character of these funds will also be lost since they will have the freedom to allocate where the fund manager pleases in only 25 per cent of the portfolio.
Is the new fund suited for your portfolio?
In the days that follow, asset management companies will hold discussions with the regulator. “Most fund houses will, I believe, try not to change the strategies of their funds too significantly. They are more likely to change the fund category rather than realign its portfolio too much,” says Belapurkar.
Fund houses have time until January 31, 2021, to comply with the circular. Once your fund house has decided what it wants to do with its multi-cap fund, it will communicate its decision. At that point, check what the new allocation of the fund will be to various market caps and whether this fund still fits into your portfolio. “If by investing in this fund, your exposure to mid- and small-caps becomes too high, and makes your portfolio riskier than what your tolerance level allows, exit the fund,” says Bala. She adds that if things get too complicated, investors may be better off building their portfolios with pure large-, mid- and small-cap fund. Investors who wish to follow an even more simplified approach of investing in the entire market with a single fund, while taking the passive route, may opt for a Nifty 500 index fund.
Continue with your SIP in your multi-cap fund for the present. If its mandate changes, you will get one month to exit it without paying an exit load. “If you decide to exit the fund, try to minimise the tax impact,” says Belapurkar.
Avoid betting on mid- and small-cap stocks or funds expecting them to rise because of re-allocation by fund houses. As mentioned earlier, fund houses will consider all sorts of options, in which case the widely-expected re-allocation in favour of mid- and small-cap stocks may not materialise, and you may suffer losses.
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