Stirring Up a Hornets Nest
Consistency and continuity in every aspect of the functioning of the stock market, be it regulation, makes it stronger and reduces the uncertainty. The recent SEBI circular with regard to changes in the asset allocation of multi-cap funds is likely to disturb both consistency and continuity in the equity-dedicated mutual funds. As per the regulator, by January 31, 2021, multi-cap funds need to have at least 25 per cent of their assets in large, mid and small-cap stocks and this is to be done under the pretext that the funds should be ‘true to the label’.
The large-cap stocks currently form almost 70 per cent of the total market-cap of BSE-listed companies. Mid-cap and small-cap stocks form the rest 30 per cent. If we look at multi-cap funds they are also broadly holding stocks in the same proportion. Hence, any move to make mid-cap and small-cap stocks to form 50 per cent of the multi-cap funds may grossly under-represent the large-cap and make the funds more tilted towards small and mid-cap stocks, which looks inconsistent with the whole market structure.
Besides, this change is proposed within three years after the regulator has come out with exhaustive categorisation and rationalisation of mutual fund schemes. Any such change will hurt the continuity in the way funds are being managed. It might or might not hurt the funds’ future performance but it will definitely make investor’s selection process of these funds difficult due to change in the fundamental attribute of the funds.
At the end of August 2020, multi-cap funds have the second-highest asset under management (AUM) among the equity category. Some back-of-envelope calculation shows that multi-cap funds need to sell Rs 36,500 crore worth of large-cap stocks and buy Rs 13,400 crore and Rs 28,800 crore worth of mid-cap and small-cap stocks respectively. Such churning will adversely impact the performance of the funds and the returns of their unit holders. This will unnecessarily create confusion and worry among investors.
I believe the situation is still fluid; the industry body is making its representation to the regulator and moreover, SEBI has welcomed suggestions. Therefore, it makes sense for investors to wait and watch instead of exiting or entering the funds in haste.
SHASHIKANT