Multi cap norms revive interest in large & mid cap funds | Economic Times

Large & mid cap mutual fund category was the first victim of Sebi’s strict categorisation norms that were introduced three years ago. Many mutual fund advisors struggled to explain the large & mid cap category, mandated to invest 35% each in large cap and mid cap stocks. However, the new multi cap investment norm introduced by Sebi in the last week is reviving interest in these schemes. At least, many investors are talking about large & mid cap schemes to their advisors and in many mutual fund forums.As you would know, Sebi has tweaked the investment mandate for multi cap schemes on September 11. As per the new norms, multi cap schemes must invest at least 25% each in large cap, mid cap, small cap stocks. If the large & mid cap category was a victim of compulsory investments in mid cap stocks all the time, multi cap schemes lost their flexibility to switch from one market category to the other.In fact, the new norms take away the USP of multi cap schemes: the fund manager had the freedom to invest across market capitalisations and sectors, and he also had the freedom to switch between sectors or market capitalisations based on his outlook. That could explain why the multi cap category is currently invested mostly in large cap stocks, with a small exposure to mid cap stocks. Most schemes have very little investments in small caps. Large cap stocks tend to do better in an uncertain economic environment. Mid cap and small cap stocks struggle in such a scenario.Now, how does this breath a new life into large & mid cap schemes?Unless Sebi allows the introduction of a new category called flexi cap, investors don’t have much choice but to look for options available in the market. Unless an investor is savvy enough to stitch together different mutual fund categories to build a mutual fund portfolio to match his desired allocation, s/he would be forced to settle for a category that invest in different market capitalisations.For example, if a mutual fund investor wanted to invest across market capitalisations and sectors but not sure how to do it, he would have earlier invested in a multi cap scheme. The fund manager would have decided the exposure to different market capitalisations and sectors based on his outlook. This option will not be available to investors after February 2021.If they are investment savvy, they can invest a large part of the corpus or investment amount, say, 70% in large cap funds, 20% in mid cap funds, and 10% small cap schemes as per their desired allocation. However, if they want a scheme to do the job, they would be forced to turn to large & mid cap schemes to do the job.Why? Most regular investors are not comfortable with the idea of investing in small cap stocks. The segment is populated by unscrupulous promoters and operators in the market driving the stock prices up or down. This is the reason why investing in small cap stocks is considered a specialist’s job. That could perhaps explain why only a few mutual fund managers in the country have managed to build a reliable record of managing small cap schemes in the country.Since they are strictly against small caps, many investors have suddenly discovered that most multi cap schemes used to have a large and mid cap strategy before the recategorization was carried out by Sebi three years ago. In those days, most multi cap schemes or diversified schemes used to invest mostly in large cap stocks with considerable exposure to mid cap stocks.Can large & mid cap schemes take up the role successfully? Well, most advisors are yet to make up their mind. Ever since Sebi introduced the large & mid cap category, advisors have been waiting to see how the category would position itself. Advisors believe that over a long period, there would be two distinct types of large & mid cap schemes. One that is tilted towards large cap stocks and another with a bias towards mid cap stocks.However, the peculiar market conditions in the last few years have not been conducive to this development. Therefore, many advisors are asking investors to wait for the outcome of the new multi cap norms before taking a final call.Best large & mid cap schemes to invest in 2020.