Revamped multi-cap MFs: What should you do? | Economic Times

Multi-cap funds are set for a complete makeover. The regulator has prescribed minimum allocation norms that will require these funds to invest at least 25% each in the large-, mid- and small-cap baskets. With the category currently enjoying flexibility to invest anywhere, this recalibration has implications for investors. Should you continue with your fund or exit now?Being true to labelUntil now, multi-cap funds in India have always had a distinct large-cap tilt in their portfolios. With no specific restrictions on allocation to various market cap segments, these had complete freedom to invest anywhere in any proportion. Most multi-cap funds have around 70-80% in large-caps. These park 10-20% in mid-caps and up to 10% in small-caps. Going purely by math, the revised norms will radically alter your multi-cap fund's risk profile. Fund managers will have to sell off a chunk of the largecap portion and buy mid- and small-cap stocks to meet the regulatory requirement. They may be forced to hunt lower down the quality ladder to conform to the allocation norms. Ankur Maheshwari, CEO, Wealth Management, Equirus Capital, says, "The revised norms intend to bring alignment with the diversified nature of the category. Most multi-cap funds are actually run as quasi large-cap funds."AMCs on their part insist they are simply adhering to realities of the underlying index, which itself is biased towards large-caps. "We have never felt the need to explore beyond current allocation as it aligns with market realities. Arbitrarily fixing allocation will distort the true picture instead of allowing funds to move in line with broader index," argues the fund manager of a leading AMC.Besides, it presents crippling liquidity problems for fund managers. Kotak Standard Multicap-managing assets close to Rs 30,000 crore-has 18% allocation to mid-caps and barely 1% presence in small-caps. If it continues with current mandate, it will have to redeploy Rs 7,000 crore in the small-cap segment within five months, the deadline for implementing the new rules.Buying such large quantities of shares in an illiquid segment like small-cap is not feasible without incurring huge impact costs. There are currently five multi-cap schemes managing assets greater than Rs 10,000 crore, which could immediately face hurdles under the new regime. Smaller funds will start facing problems as they grow bigger in size.Embracing a new mandateHowever, it is more likely that fund companies will find ways around this problem. Experts reckon that several multi-cap funds may simply be repositioned to escape the regulatory shackles. Piyush Gupta, Director - Funds Research, CRISIL, says, "The move to make multicap schemes true to their label could set the industry aflutter and result in mergers, movement and new scheme launches." Some funds may shift to another category, merge or even swap mandates with an existing fund in another category such as large-cap fund or large and mid cap fund. Kotak Standard Multicap, for instance, has the option to swap positions with its Rs 2,500 crore large and mid cap offering, Kotak Equity Opportunities Fund.Bigger multi-cap funds with modest small cap exposure don’t gel with new normsThese will have to deploy huge sums into small-cap stocks or opt for a different mandate. 78201017Some funds may consider moving to the value or focused mandate. For a few schemes, the transition may be seamless. A fund like Parag Parikh Long Term Equity, which swears by its "go anywhere" approach, may simply take on the mandate as a value fund-an investing philosophy it already leans on. This will also allow the fund to maintain its distinct foreign equity exposure.Fund houses already having presence in other categories may even reposition as a thematic offering such as ESG fund. Reports suggest AMCs have made representations to Sebi for introducing a new 'flexi-cap' category that permits flexibility of multi-cap funds in their current form. If introduced, this will allow AMCs to simply move the multi-cap offering over to the new segment. Fund managers admit most multi-cap funds will prefer this route.Others may choose to remain in their current avatar. A handful of funds like Nippon India Multi Cap (18%), Invesco India Multi Cap (21%) and PGIM India Diversified Equity (16%) already have beefy exposure to the small-cap segment, so will hardly be impacted.What investors should doExperts caution against a knee-jerk reaction to the revised norms. Do not immediately rush for the exit. Wait for more clarity on how your fund intends to position itself under the new regime. AMCs have a variety of options at their disposal to comply with the revised norms without compromising on portfolio quality or risk profile. With AMCs likely to reposition to prevent altering of scheme risk profile, investors may not have to worry about quality dilution. "Do not be in a hurry to act on the new rules. AMCs have already acknowledged the need to act in investors' interests," Maheshwari points out.If your fund decides to remain a multicap offering, you may need to review your fund choice. Ascertain the extent of resulting change in risk profile. If you are simply not comfortable with the hefty presence in the mid or small-cap space, you may consider shifting to a more suitable category. A large and mid cap fund may offer the closest profile to a multi cap fund. Experts insist that any shift should be guided by your overall asset allocation.