Indian funds seek to calm investors after rule change affects $20 billion in equity assets

The Securities and Exchange Board of India (SEBI) on Friday said so-called multi-cap funds should invest a minimum 75 percent of their assets in stocks, but spooked industry by mandating equal allocation of 25 percent between large-, mid- and small-cap shares.

Indian fund managers on Monday sought to assuage investor concerns that a regulatory change affecting portfolio structures of some equity funds which manage assets worth $20 billion will make such holdings riskier and destabilise the market.

The Securities and Exchange Board of India (SEBI) on Friday said so-called multi-cap funds should invest a minimum 75 percent of their assets in stocks, but spooked industry by mandating equal allocation of 25 percent between large-, mid- and small-cap shares.

Such funds, which roughly account for a fifth of India's over $100 billion equity mutual funds industry, faced no such restrictions before and were heavily invested in large-cap stocks, considered safer than their smaller peers.

The rule change sparked fears the funds will start dumping those stocks in favour of riskier bets to comply, causing market volatility, but fund managers on Monday said they won't act in haste and urged investors to stay put.

"I will not end up buying small- and mid-caps at any price, at any valuation, if it doesn't make sense for my investors," said Nilesh Shah, the CEO of Kotak Mutual Fund which manages India's biggest multi-cap fund with assets of about $4 billion.

The new rules announced by SEBI - set to come in force from February 2021 - were aimed at addressing "skewed portfolios" of such funds as some of them, according to data from Morningstar India, have allocated more than 70-80 percent to large-cap stocks.

If the funds were to dump large-caps to comply with the new rules, they would have to collectively sell an estimated $5.6 billion in such stocks and buy $3.8 billion in small-caps and $1.84 billion in mid-caps, brokerage Emkay Global estimated.

Fund managers also said small- and mid-cap stocks surged in India on Monday in anticipation of possible big purchases by funds under the new rules in the coming weeks.

The Nifty small-cap index jumped about 5.5 percent and the mid-cap index rose more than 3 percent compared with a 0.7 percent rise in the main Nifty 50 index that largely represents large-cap.

But Shah and other managers said several options were being explored, including merging such schemes with large-cap funds or asking unitholders to shift to other plans.

One Indian fund manager said the industry was planning to seek more time from SEBI to comply with the new rules, while also requesting a complete re-think.

"There is a lot of chaos and noise in the market ... We are not doing anything. Investors also should not do anything in a hurry," he said, declining to be identified.

SEBI on Sunday said it was conscious of the need to maintain market stability and will examine any proposals made by the mutual fund industry.