Impact of SEBI’s revised asset allocation guidelines for Multicap Funds

Change in current guidelines

SEBI has notified revised asset allocation guidelines for Multi-Cap Funds where they would be required to invest minimum 75% of total assets in equity & equity related instruments (against requirement of 65% earlier). Further, they have been mandated to invest atleast 25% of the total assets to be invested in each of the Large-Cap, Mid-Cap and Small Cap categories.

Based on our analysis (refer the Exhibit 01) of the Multi-Cap Funds with total AUM of Rs.1.47 tn (as on August 2020), 73.2% of the total assets are invested in the Large-Cap companies while Mid-Cap and Small-Cap categories have only 15.2% and 5.9% allocations, respectively.

The Way Ahead

Fund Managers have been given time till January 2021 to comply with these revised asset allocation guidelines. The rebalancing of existing Multi-Cap portfolio would translate into Rs.14,300 cr and Rs.28,000 cr of potential inflows to Mid-Cap and Small-Cap companies while it could lead to potential outflow of Rs.34,000 cr from the Large-Cap category.

In terms of percentage, large-cap category could see ~32% of outflow from the existing holding in the large-cap companies. For Mid-cap and Small-Cap categories, this percentage would be much higher – 64% and 322% of their existing exposure in Multi-Cap category. Nonetheless, this might not have material impact on the large-cap stocks, given the liquidity in those stocks. However, the lack of liquidity in Mid-Cap and Small-cap categories can create impact cost for several of the Multi-Cap Funds.

On the other hand, FM can also merge the existing Multi-Cap schemes with the existing Large Cap/Focussed funds and launch a new multi-cap scheme. There could be even inter-scheme transfers, where one scheme of a Mutual Fund sells securities to another scheme within the fund house rather than selling the assets outside. We have seen these kinds of transfers in the recent past, post Franklin Templeton debt crisis. Moreover, several of the AMCs are coming with NFOs in coming months which increases the chances of inter-scheme transfers in near future.

Exhibit 01: Impact on Multi-Cap Fund

Source: ICRA; based on assumption that Mid-Cap & Small-Cap would get 25% allocation and rest 50% allocation to the Large cap companies.

Impact varies across Funds:

Invesco India Multi-Cap Fund would have minimum impact where it has to increase Small-Cap exposure by only 4% of its assets. Similarly, Parag Parikh Long-Term Equity Fund is likely to see limited impact due to its higher exposure (27-28%) to the overseas stocks. However, it has to enhance the Mid-Cap and Small Cap exposure by 9-10% each.

On the other hand, impact would be much higher for Axis Multi-Cap Fund which has to allocate ~22% and 25% of its existing assets to Mid & Small Cap companies. Similarly, Motilal Oswal Multi-Cap Fund has to increase exposure to Mid & Small Cap by ~24% and ~20% of its assets, respectively. Kotak Multi-Cap Fund having AUM of Rs.29,714 cr has to buy Rs.7,078 cr of Small-Cap companies (~24% of its asset) and Rs.2,722 cr (~14% of its asset) of Mid-Cap companies. Another big fund, HDFC Equity Fund with AUM of Rs.19,800 cr, would also see a large churn – about 38% of required allocation together in the Mid & Small Cap companies.

Disclaimer: The views expressed here are based solely on information available publicly/internal data/other reliable sources believed to be true. Facts presented have been verified, however, the same may contain human errors/ errors from database. The information is provided merely as a complementary service and do not constitute an offer, solicitation for the purchase or sale of any financial instruments, inducement, promise, guarantee, warranty, or as an official confirmation of any transactions or contract of any kind.