New Sebi rules effect on your multi cap mutual funds


        The Securities and Exchange Board of India (SEBI) has on 11/09/2020 issued a circular bringing about changes to fundamental characteristics of Multi Cap mutual funds.

What are the current rules regarding asset allocation for Multi Cap mutual funds?

Presently multi cap mutual funds need to invest a minimum of 65% of total assets into equity.

This 65% is needed for any equity fund and not just multi cap mutual funds to qualify as equity funds which has a favourable tax proposition.

This 65% is only minimum which can even go up to 100% in case the fund manager so desires.

Whatever the allocation between 65% to 100%, there is no restriction with relation to large cap, mid cap or small cap stocks.


What are the proposed changes to Multi cap mutual funds?

Minimum investment of 75% into equity (as opposed to earlier rule of 65%) which would be divided in the following manner:

  1. Minimum 25% of investment into equity and equity related instruments of large cap companies (as opposed to n0 such restriction earlier).
  2. Minimum 25% of investment into equity and equity related instruments of mid cap companies (as opposed to no such restriction earlier).
  3. Minimum 25% of investment into equity and equity related instruments of small cap companies (as opposed to no such restriction earlier).

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What options do Mutual fund companies have?

Most mutual fund companies have made their reservations known regarding the proposal to the respective authorities.

In case no changes are made to the original proposal then the mutual fund companies have the following options but not limited to:

  1. Merge current multi cap fund scheme with another scheme of the same fund house like focused, large & mid cap, etc.
  2. If not merged with another scheme, mutual fund companies have the option of moving the current multi cap to another category like focused, large & mid cap, etc. in case they are not in existence currently.

There are already talks of a new scheme called ‘flexicap’ which would allow current multi cap mutual fund schemes to continue with their current strategy with multi cap mutual fund schemes needing to adopt to the new proposals.

Meaning there would be two categories, flexicap mutual funds and multi cap funds but these are only been discussed and nothing has been formalized yet.

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Probable Impact

The first and foremost impact would be seen in the movement of funds between various caps, that is large, mid and small.

Presently most multi cap funds, at least the larger and popular ones are more biased towards large cap stocks.

Therefore, in order to comply with the new order, one can expect more purchases being made in mid and small cap stocks, more small cap than mid cap stocks looking at the current scenario.

In the same manner there will have to be trimming in multi cap schemes with more than 50% allocation to large cap stocks.

This would affect the already volatile market since all these actions have to be performed within the stimulated period.


Possible explanation for this new proposal

The regulator believes that most multi cap mutual fund schemes were basically large cap schemes in terms of their asset allocation disguised as multi cap funds.

These multi cap funds were therefore not true to their label.

There is an element of truth but existence of truth does not imply a lie part as well, the universe is not as binary as we believe so.

Sure, most multi cap funds presently are more large cap biased but we also need to understand the reasons behind the same rather than simply drawing conclusions based on current allocations

  1. The Indian stock market has been more or less volatile during the last few years and large cap stocks provide more stability than mid and small cap stocks.
  2. Large cap stocks do not face liquidity issues as much as mid and small cap stocks.
  3. The idea behind a multi cap fund is to allow the fund manager freedom to move around various sectors based on his understanding of the market.
  4. A multi cap fund at the end of the day is still an actively managed fund that needs constant overlooking to make sure the overall portfolio is balanced.

Investors looked at multi cap funds as a safe and uncomplicated haven since they did not have the burden or compulsion of being confined to sectors like say in the case of mid cap, small cap, large & mid cap, thematic mutual funds, etc.

A multi cap fund was one fund where the fund manager would deviate across various sectors, caps and themes based on market movements.


Are multi cap funds really large cap funds in disguise?

This is a very lazy observation on the face of it for the following reasons:

  1. Large cap mutual funds at all times irrespective of the market situation need a minimum allocation of 80% into large cap stocks.
  2. Granted most multi cap funds are more large cap biased at the moment but being large cap biased and needing to be 80% invested into large cap stocks at all times is not the same thing.
  3. A multi cap mutual fund scheme has the option to increase its allocation to mid cap and small cap stocks if the market conditions allow him to and the fund manager feels the need to.


Which has taken place in the past too but more with mid cap stocks than small cap stocks and rightly so.

Equity investing is all about value and not price and if the fund manager does believe the price is right then it becomes very difficult to justify the value.

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Where and why this move could backfire?

The Nifty 500 is 81% into large cap stocks, 14% into mid cap stocks and 5% into small caps.

If there has to be a true to label multi cap scheme then it should be around the current Nifty 500 distribution and not what the current proposals aspire to.

As it is, mid and small mutual fund schemes are extremely volatile and so many naïve investors foray into it only on the promise of high returns without any regard to volatility.

The proposed structure would make even multi cap funds volatile, a large & mid cap would which is considered slightly more aggressive than a multi cap fund would become more conservative than a multi cap fund.

This is because a  large and mid cap mutual fund scheme needs only a minimum allocation of 35% into mid cap stocks whereas a multi cap fund under the new proposal would need 50% of its total allocation into mid and small cap stocks.

     This can wreak havoc in a falling market since mid and small cap stocks suffer the most during a fall.


             The point of a multi cap fund does not mean being invested in all caps all time, it only means having the option to enter and exit all caps as and when market conditions permit backed by fund manager expertise.


  1. Small cap stocks have historically in India also suffered from poor financial structures, management, liquidity, etc.
  2. If we go by the number of stocks in each large, mid and small cap space, the small stocks outweigh the large and mid cap space by a very huge margin.
  3. Despite the number of stocks available in the small cap space, most fund managers still shy away from taking too much exposure in them due to not enough quality choices being.

This is also one of the reasons why SBI Small cap fund stopped accepting fresh lumpsum investments from this month.

Now imagine expecting Kotak Standard Multi Cap fund, the largest multi cap fund needing to allocate 25% of its total assets into small cap stocks.

This would amount to 7,428 cr, now keep in mind that SBI small cap fund, the same small cap fund that stopped accepting fresh lumpsum investments due to not finding enough quality has an aum of 5,000 cr.

Let that sink in.

              Irrespective of how this plays out, what’s for sure is that this could have been handled much better but then again the way things have been playing out with the mutual fund industry recently, it would not be surprising even if fund managers are told the names of stocks that they should buy.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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