New SEBI clause for mutli-cap funds
In a recent circular shared by SEBI on Thursday, mutli-cap funds are required to invest atleast 25% in large cap, mid cap and small cap stocks.
Let’s dive in deep to understand how it can affect the markets and bring changes.
Mutual funds are entities which collect money from various small investors and then invest these huge sums into stocks and then distribute the profits accordingly. In a mutual fund, the mutual fund manager picks out the stocks for the investors and creates the portfolio.
Now suppose you are buying a part of an IPL team, the mutual fund manager is like the coach who picks the players.
This is what the coach of different team promises to get in the auction
- Famous stable players (Kohli, Sachin, Dhoni)
- Explosive aggressive players (Rohit Sharma, Hardik Pandya, Sehwag)
3. Upcoming new comers (Rishabh Pant, Shubham Gill, Shreyas Iyer)
4. Players from each category
You can think of them as Large cap, mid-cap, small cap and mutli-cap funds respectively.
Large caps are top companies with top 100 market capitalisation followed by mid caps and small cap stocks
Now if you were buying a part of Team 4, you would expect that the coach would pick players from each category and you will have a balanced team.
This was also expected from multi-cap funds, people expected that they would get exposure in each category but the things were different. In reality most of the multi-cap funds were majorly large cap stocks, some mid-caps and very small contribution of small caps.
We scanned through the data and found out that among the multi-cap funds, this was the average composition:
Large caps — 66.6%
Mid caps — 17.3%
Small caps — 9.1%
Cash — 7%
Investments in small and mid cap stocks were significantly lower and if the investor wanted such exposure to large cap stocks, he/she could have bought large cap funds but he choose mutli cap funds specifically to get exposure in all of them.
With this new circular in play, now if a fund has ₹1000 cr AUM, they would need to put ₹250 cr in large cap, mid cap and small cap i.e 25% each and the rest 25% they can allocate according to their discretion.
Now what would this mean for markets, As we know currently majority of fund have huge large cap exposure and lowest small cap exposure. They would need to bring down exposure in these large caps and shift money to small and mid cap stocks.
As of August 2020, of the total 323 funds categorized as “equity schemes” there are a total of 35 multi-cap funds, as per AMFI data. These multi-cap schemes together have an AUM of Rs 1,46,708.38 crore.
We can see buying in small cap and mid cap stocks to the tune ₹30k cr and jump in prices in quality mid-cap and small cap stocks. While exposure to large caps can be reduced. Funds need to comply with these guidelines till Jan 2021
One more possible outcome is that funds might merge their mutlicap schemes with existing large cap schemes and launch new mutli-cap schemes.
So the task for you is to:
1) Find quality undervalued midcap and small cap stocks and buy them before mutual funds does (as when mutual fund buys with big money the prices will go up)
On a lighter note, SEBI has the following idea
So find your best spinner like kachra(midcap,smallcap stocks) which opponents are underestimating and you can see some good returns coming up.
Happy investing!
