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Sebi imposes limits on multi-cap fund investments; churn in mutual fund schemes worth Rs 40K cr likely

The stock markets are set to witness a portfolio reshuffle over the next few months as fund houses will shift their allocation of multi-cap funds from heavily weighted large-cap companies to mid- and small-cap companies in a bid to adhere to the minimum investment requirement of 25 per cent each in large-, mid- and small-cap companies.

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi |
Updated: September 12, 2020 11:17:26 am
mutual fund scheme, SEBI, multi-cap fund investments, economy news, Business news, Indian express newsSebi reiterated that to achieve the desired objective of true to label and appropriate benchmarking, it will examine proposals of the industry, if any, received in this regard. (File)

In a significant move that could lead to a big churning of around Rs 40,000 crore in mutual fund portfolios, the Securities and Exchange Board of India (Sebi) has slapped limits on stock market investments of multi-cap schemes of mutual funds.

The stock markets are set to witness a portfolio reshuffle over the next few months as fund houses will shift their allocation of multi-cap funds from heavily weighted large-cap companies to mid- and small-cap companies in a bid to adhere to the minimum investment requirement of 25 per cent each in large-, mid- and small-cap companies.

The market regulator, in a circular issued on Friday, has specified that minimum investment in equity and equity-related instruments of large-, mid- and small-cap companies should be minimum 25 per cent each of total assets. As most of the fund houses have parked funds in large-cap stocks, they will have to exit from those and move funds to mid- and small-caps. This is being done to “diversify the underlying investments of multi-cap funds across the large-, mid- and small-cap companies and be true to the label”, Sebi said.

According to industry data, mutual funds will have to reallocate assets worth Rs 40,000 crore into mid- and small-cap companies to meet the minimum investment requirement set by Sebi for multi-cap funds.

Data shows that multi-cap schemes have total assets under management of Rs 1.45 lakh crore. Of this, around Rs 1.05 lakh crore is invested in large-cap stocks and the exposure into mid- and small-cap stocks is around 16.4 per cent and around 6.25 per cent, respectively. This means that the industry will have to move around Rs 12,600 crore into mid-cap stocks to take midcap’s share at 25 per cent and move over Rs 27,000 crore into small-cap stocks to take its share at 25 per cent.

“Fund houses will have to cut their exposure to big cap stocks and invest in mid- and small-cap stocks. There could be a churn involving around Rs 40,000 crore. Though Sebi has given the MF industry four months time to revise their portfolios, many of them may start doing it in advance,” said a fund manager.

According to Sebi, all the existing multi-cap funds should ensure compliance with the provisions within one month from the date of publishing the next list of stocks by the Association of Mutual Funds in India — i.e. January 2021.

Sebi has defined large cap companies as top 100 listed companies in terms of full market capitalisation, midcap as next big 101 to 250 companies in terms of full market capitalisation and small cap as companies above 251st in terms of full market capitalisation. “Most of fund houses have parked funds in big caps like Reliance, TCS, Infosys, HDFC, HDFC Bank an Hind Unilever. There could be some price corrections in large, mid and small caps because of the Sebi stipulation,” said veteran BSE broker Pawan Dharnidharka.

“A huge fund flow to big caps had artificially pushed up benchmark indices recently. With fund houses going after big caps, retail investors are also buying into big caps. There is huge liquidity in the financial system which is driving up stock prices,” he said.

On August 21, Reserve Bank of India Governor Shaktikanta Das warned that there is a clear disconnect between sharp surge in stock markets and the state of real economy as surplus global liquidity is driving up asset prices across the world. He forecast that there will be “definitely be a correction” in stock markets and the central bank is prepared to take all steps that are required to maintain financial stability.

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