​Will your multi cap scheme become ESG fund? | Economic Times

You might know that the fund houses are exploring various options to tackle the tricky issue of new Sebi investment mandates on multi cap mutual funds. One of the options the managers keep repeating is converting multi cap schemes to ESG schemes to escape the new norms. Sure, they also talk about other options like turning multi cap schemes to value funds, focused funds, large & mid cap schemes and so on. However, ESG theme, a relatively new theme in the Indian mutual fund space, is raising lot of debates among advisors and investors.For the uninitiated, Sebi has changed the investment mandate of multi cap mutual funds on September 11. As per the new norms, multi cap schemes should invest a minimum of 25% each in large cap, mid cap, and small cap stocks all the time. Mutual funds have time till January next year to meet the norms.However, many fund managers believe that 50% investments in mid and small cap stocks would make these schemes extremely risky for regular investors who choose multi cap schemes to meet their long-term goals. This is one of the main reasons cited by fund houses to convert the existing multi cap schemes to a category that would help them to invest in a diversified portfolio with low risk. Will ESG theme fit the bill? “If the flexi cap option that has been suggested by some fund houses is accepted by Sebi, I think there is no issue. However, if that doesn’t happen, some fund houses are going to either merge their schemes into large & mid cap schemes or convert them to ESG funds,” l,” says Neeraj Chauhan, CEO, The Financial Mall, a wealth management firm, based in Delhi. “Big funds might face troubles merging with other schemes, so ESG can be one option. In that case, the fundamental attributes of the scheme will change, and investors might have to take a call,” adds Neeraj Chauhan.Mutual fund advisors believe that even though ESG has been applauded globally, the theme cannot replace multi cap schemes. Since the theme is new to Indian markets, there are not many options to invest. This raises questions on whether ESG funds can match multi cap funds terms of performance.“The ESG compliant stocks will not be many in India. We expect large companies and a few mid-sized companies may be adhering to Environmental, Social and Governance norms in India. So, when the universe becomes small, the return expectation can’t be high. Also, in a portfolio, multi cap schemes had a totally different role of managing volatility by switching market caps. ESG funds can’t do that job for an investor,” says Babu Krishnamoorthy, Chief Sherpa, FinSherpa Investment Services, a financial advisory firm, based in Chennai.Earlier, multi cap mutual funds had the freedom to invest across all sectors and market capitalisations and also switch between them based on the outlook of the fund manager. However, the new norms will take away the freedom given to fund managers. Now, they will be forced to allocate at least 25% in each large cap, mid cap, and small cap stocks.The third point that worries mutual fund advisors is that the risks involved with an ESG thematic fund might not suit those who chose to invest in a multi cap fund in the first place. Advisors say that the ESG Funds are essentially thematic funds and hence not suitable for many investors. “There might be IT companies that are ESG compliant; there might be pharma companies that fall into that list. In absence of a diversified universe, these schemes can also become risky for moderate investors,” says Neeraj Chauhan.Advisors say that even though the timeline is really tight, investors should not take any decision right now. They believe that a decision must be taken only after clarity from the fund house and Sebi. They also believe that like re-categorisation, investors will be given an exit window if their scheme changes its fundamental attributes. Sebi has given mutual funds time till January to make the necessary changes in their portfolios.“If such changes happen, this can be painful for the investor in many cases. If the fund houses change or convert schemes, investors will have to sell their investments. There is also an expectation of volatility around January after the US Election. In that case, it can be double-whammy for the investor. However, I would suggest investors to not move out till all the cards are on the table from the fund house’s side,” suggests Babu Krishnamoorthy.