To diversify the investments of Multi Cap mutual fund schemes, markets regulator Securities and Exchange Board of India (Sebi) has prescribed that a minimum of 25 per cent each be invested in large, mid and small cap companies.
The minimum investment in equity and equity related instruments will be divided in 75 per cent of total assets. Minimum investment in equity and equity related instruments of large cap companies will be 25 per cent of total assets. Similary, for mid cap and small cap companies, 25 per cent each of total assets will be allocated.
All MFs have to ensure compliance by the first week of February 2021. AMFI will publish the next list of stocks according to market capitalisation criteria in January first week and the compliance has to be within one month of that.
Market expert Madhusudan Kela said in a tweet, "This is a FANTASTIC move from SEBI and a truly defining moment for the Multi Cap category funds. It will immensely help broad base the current MF holdings and give due recognition to lot of deserving small/mid cap companies."
"In a fast growing country like India, this will help smaller size companies to tap equity markets for growth funding. Lot of small companies are trading at extremely cheap valuations compared to their true potential," Kela said.
"Finally, this will bring enormous benefits to lot of small investors who have invested in smaller sized companies and holding for long period in anticipation of true price discovery," he added.
The move is expected to be help small investors and small companies to get better valuations.
Reacting to the Sebi move, Joseph Thomas, Head of Research, Emkay Wealth Management, said, "At present, the multi cap funds have almost 70 per cent of their allocation to large cap stocks and the balance to mid cap and small cap stocks. The new regulation will make it mandatory that any market cap may have a minimum allocation of 25 per cent, and therefore, to the extent of the excess allocation to large cap mutual funds will have to reduce the allocation, that is, 20 per cent, and move into mid caps and small caps.
"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 mid cap and small cap stocks to move up on the light of their share going up in terms of allocation."
Currently, as of August-end, the multi cap funds have assets under management of Rs 1.46 lakh crore. Experts say that these funds will have to be moved out from large cap stocks where currently the fund holdings are concentrated. It is expected that anywhere between Rs 25,000 crore and Rs 35,000 crore can flow into mid cap and small cap companies.
Most of the multi cap funds are more than 70-80 per cent concentrated into large cap stocks.