SEBI New rules: On 11th September, 2020, Securities & Exchange Board of India (SEBI), issued a circular for the mutual fund houses and Asset Management Companies (AMC). The circular was aimed to partially modify the characteristics of a Multi Cap Fund to make it more true to its name. A Multi- Cap Fund is a Mutual Fund that invest their assets and surplus in equity and equity related stocks of companies based on varying market capitalisation.
As per New rules, SEBI made it a mandatory requirement that minimum of 25% of total assets must be allocated in Large, Mid & Small Cap Companies each. It means allocation of fund in the manner of:
- 25% for Large Cap,
- 25% for Mid Cap and
- 25% for Small Caps.
SEBI has provided existing Multi Cap Funds with one-month time to comply with the above provision. Till now these funds on an average invested around 70% of their assets in large- caps, 22% in mid- caps and 8% in small caps.
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Difference between Large, Mid and small cap companies.
In simple words, Market Capitalization is the market value of the company’s outstanding shares. The formula to calculate Market Capitalization or Market Cap of any company is:
Number of outstanding shares x share price
Based on the market cap, companies are classified as large-cap companies, mid-cap companies, and small-cap companies. In order to ensure that equity schemes follow uniform norms for defining large, mid, and small caps, the Securities and Exchanges Board of India (SEBI) has defined them as follows:
In Indian Stock Market, a Large-cap company is a company with a market capitalisation ranking from 1st to 100th. For Example – Reliance Industries, TCS, HDFC Bank.
A Mid- cap company ranks between 101st to 250th in terms of market capitalisation. Example- YES Bank, UCO Bank, IDFC First Bank etc.
A Small-cap company ranks 251st onwards in terms of market capitalisation. Example- Blue Star, VIP Industries, Blue Dart etc.
The move can be beneficial for the economy and employment in the run as small companies will be able to get more funds from sources other than debts.
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What will be the impact?
A large number of funds will change from large- cap stocks to mid and small – cap stocks. This can lead to a rally in Small and mid- cap companies. For investors, this could mean having an option to invest in a purely diversified portfolio. Fund Managers will now have to look at different portfolio structures to achieve their desired rate of return. Also Mid cap and Small Cap companies are riskier than well established and strong companies in Large- cap, this can increase the risk of investors.
Neil Parikh, fund manager of Parag Parikh Long Term Equity Fund, tweeted “There are options available to them under which they can continue with the existing mandate.”
Fund Manager are finding ways to save themselves from this circular. They are trying to get their Multi- Cap Fund classified as Value Fund.
Like Currently Axis Multi Cap Fund has 95.81% investment in Indian stocks of which 79.93% is in large cap stocks, 7.03% is in mid cap stocks, 0.84% in small cap stocks. While Kotak Standard Multicap Fund has 66.47% in large cap stocks, 22.5% in mid cap and 1.53% in small cap stocks.
This rule can bring a rally in Mid and Small Cap stock market and a transfer of about 10,000 crores to 25,000 crores from Large Cap stocks to Mid and Small Cap Stocks.
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What should Investors do?
Investors should understand their own risk profile and go with the mutual fund that matches with it. If their Multi Cap Fund changes their investment pattern because of the circular and the change is significant, it might become riskier for them now and they can consider withdrawing. But if the fund’s composition of assets between Large, Mid and Small Cap Stocks has hardly changed after the notification then they can continue with the fund.
Also trust can be placed on the skill and experience of the fund managers. If investors trust and have faith in their fund manager’s ability to get good returns and find value stocks and companies, then they should not worry. Investors should wait for 1 month first before taking any action.
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The author of the above article is Manav Khanna.
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