SEBI clarifies on new multi cap fund rule, says mutual funds have many options

SEBI on Sunday said that mutual funds have many options to meet minimum criteria of circular pertaining to asset allocation framework for multi cap schemes based on the preference of their unit holders

SEBI on Sunday said that mutual funds have many options to meet minimum criteria of circular pertaining to asset allocation framework for multi cap schemes based on the preference of their unit holders. In a clarification, markets regulator said that apart from rebalancing their portfolio in the multi cap schemes, mutual funds (MF) could inter-alia facilitate switching to other schemes by unit holders, merge their multi cap scheme with large cap scheme or convert their multi cap scheme to another scheme category.

"SEBI is conscious of market stability and therefore has given time to the Mutual Funds till January 31, 2021 to achieve compliance with the circular through its preferred route of which rebalancing of the portfolio is only one such route," the markets regulator also said.

To achieve the desired objective of True to Label and Appropriate Benchmarking, Sebi will examine proposals of the industry received in this regard, it noted.

The markets regulator came out with the clarification days after it tweaked asset allocation framework for multi cap mutual funds through a circular issued on Friday. Under the new rule, the funds are now required to invest a minimum of 25 per cent each in large, mid and small cap stocks. The new norm gives flexibility to the fund manager with the balance 25 per cent. The new rules will be effective sometime during the first week of February 2021.

So far, multi-cap equity funds were required to invest a minimum of 65 per cent of their total assets in equity and equity-related instruments, without any category limits.

SEBI also noted that some sections of the media have reported various views on the circular and various conclusions are being drawn.

"Multi cap schemes had flexibility in terms of allocation to large, mid and small cap stocks but it was observed that some multi cap schemes have skewed portfolios, with over 80 per cent of investment in large cap stocks akin to large cap schemes, and some multi cap schemes have near zero or insignificant asset allocation to small cap companies," it also said.

Therefore, in order to achieve the objectives of True to Label and Appropriate Benchmark, a need was felt to review the scheme characteristics of Multi Cap schemes and take necessary steps to clearly distinguish Multi Cap schemes from other categories of schemes, SEBI noted.

Also read: BT Buzz: How changes in multi-cap funds will affect your investment after new SEBI rules