Broader market awaits Rs 40,000 crore bonanza as Sebi tweaks multicap fund rules

NEW DELHI: Securities and Exchange Board of India (Sebi) on Friday tweaked the categorisation rules for multicap funds, increasing the minimum equity investment for the category. This will result in up to Rs 40,000 crore moving from largecap to broader market, said analysts.

The market regulator said multicap funds will now invest minimum 75 per cent of total assets in equities with 25 per cent each in largecap, midcap and smallcap companies.

“In order to diversify the underlying investments of multicap funds across the large, mid and smallcap companies and be true to label, it has been decided to partially modify the scheme characteristics of multicap fund,” said Sebi.

Earlier the minimum mandated investment in equity and equity related instruments stood at 65 per cent of total assets with no guidelines on how they were allocated across segments.

It said all the existing multi cap funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e., January 2021.

“Traditionally a lot of multicap funds had a large cap bias. To meet the new norms, they will have to reallocate a fair bit of their largecap holding to small or midcap stocks. That will add to buying pressure on smallcap counters, which may impact liquidity and prices,” said Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser India.

He is seeing reallocation of Rs 40,000 crore from largecap to mid and smallcap stocks. Out of this Rs 13,000 crore will go to midcap and and Rs 27,000 crore to smallcap stocks.

“This is a significant amount of money that will flow there. Fund managers will have to ensure they are finding the right opportunity and manage the investment in such a way that impact on prices is limited. Finding big blocks is harder in smallcaps as the liquidity is constrained, so even the execution will be important,” Belapurkar said.

Sunil Singhania, Founder of Abakkus Asset Manager said, this is a great and thoughtful exercise and it will broaden the market and make it more balanced.

“Multicap funds by name and nature should be investing all across the market cap. A lot of mutual funds were just using the name multicap but were still investing largely in largecaps. It was against the basic philosophy of the fund,” he added.

A glance through the portfolio of top five funds proved the point raised by analysts. As of August, Kotak Standard Multicap Fund, which is the largest fund in the category with AUM at Rs 29,714.07 crore has just 1.25 per cent in smallcap stocks. It holds 22.5 per cent assets in midcaps and rest in largecaps. Other funds have similar bias.

“What the market was missing after the categorisation rule came into effect was broadening of the market. Money was flowing into top 10-20 companies. As a result they were trading at 80PE multiple. And no one was willing to look at the rest of the market,” said Singhhania. “Mid and smallcap companies were struggling to even raise capital which is needed for the company and economy to grow.”

Joseph Thomas, Head of Research, Emkay Wealth Management, estimates that multi cap funds have almost 70 per cent of their allocation in largecap stocks and now an amount equivalent to Rs 35 000 crore will move out of large caps to mid and smallcaps. This move will help mid cap and small cap stocks to move up, added.

Analysts see share prices of smallcap names to surge. The Nifty Smallcap index is already one of the best performing benchmark index since markets hit a low in March. It has surged 76.40 per cent since then.

“The fallout of the rebalancing by AMCs would be visible in equity markets with Nifty Small-cap index likely to sharply outperform with buying interest from domestic institutions in the coming months. Consequently, the small-cap mutual fund schemes could be indirect gainers from the new guidelines by the Regulator,” said Jean-Christophe Gougeon, Director – Investment Solutions, Sharekhan by BNP Paribas.

Analysts believe there will be little to no significant impact on largecaps because of the money moving out as liquidity is not a problem there.


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