MFs to seek time to comply; plan alternatives to ‘protect’ investors

Even as the mutual fund industry plans to seek more time from SEBI to comply with its new regulations on multicap funds, it is already working on alternative ways to meet the new norms. These include creating a new category called flexi funds and merging schemes to protect investors from any possible negative fallout.

SEBI has made it compulsory for multicap funds to invest 25 per cent each in large-, mid- and small-cap stocks besides increasing the equity exposure to 75 per cent from 65 per cent. SEBI has directed mutual funds to comply with new norms by February.

Until now, to beat the benchmark index, the muticap funds were heavily loaded on top 5-6 companies. These funds had a nominal investment in mid- and small-cap. “It has recently been observed that some multicap schemes have skewed portfolios, with over 80 per cent of investment in large-cap stocks akin to large-cap schemes; and some multicap schemes have near zero or insignificant asset allocation to small-cap companies,” SEBI said in a statement.

Switching to other schemes

Apart from rebalancing their portfolio in the multicap schemes, mutual funds companies could facilitate switch to other schemes by unitholders, merge their multicap scheme with their large-cap scheme or convert their multicap scheme to another scheme category, SEBI said, adding that it will examine proposals of the industry, if any, received in this regard.

Addressing investors’ concern, Nilesh Shah, Managing Director of Kotak Mutual Fund and Chairman of Association of Mutual Funds in India, said the industry has asked time from SEBI to make its representation on the circular. It has also asked for extension of deadline (on compliance).

The SEBI diktat would make multi-cap funds more riskier as huge money would start chasing ill-liquid mid- and small-cap which have very few growth prospects in Covid times.

Existing investors in multi-cap fund should desist from taking any impromptu action in this evolving situation, he said.

Kotak Standard Multicap, the largest in the category with assets under management of ₹29,300 crore, will continue to be managed with the same size with minimal disruption, he assured.

Current allocation of Kotak Standard Multicap fund is large-cap biased from risk reward point of view.

“We will not buy small- and mid-cap stocks if it does not make sense for our unitholders, contrary to what is being speculated on the street,” he said.

Flexi-fund category

The industry will seek SEBI nod to create a flexi-fund category and plans to switch the multi-cap portfolio into flexi-cap. A flexi-cap fund has no restriction on investing in companies with a predetermined market capitalisation.

The best alternative, according to Shah, is to convert Kotak Standard Multi-cap to flexi-cap category to overcome the impact of the SEBI circular.

Some of the other options, Shah said, are returning money to clients, requesting investors to switch to other equity funds, merging funds, converting multicap fund to thematic fund such as ESG fund to maintain investment process and portfolio quality, said Shah.