There are counter-arguments also from the Asset Management Companies (AMCs).
1. NIFTY 500 should be an ideal benchmark for equity multi-cap funds. But a look at the composition of NIFTY 500 reveals that large-cap stocks accounted for around 78%, followed by midcap stocks (17%) and small-cap stocks (5%). As such, the AMCs were of the view that the SEBI logic of inappropriate benchmark selection was not proper.
2. In the opinion of the fund houses, flexibility is most important for multi-cap funds. The flexibility of moving from one category of stocks (say small cap) to another category (say large-cap) may be beneficial for the investors in the long run in terms of wealth creation. Market condition, valuation of stocks and future outlook are the factors based on which the fund managers switch over from one category of stocks to another category. As such, diversification is not compromised.
3. The fund houses assert that the difference in the fund name and the fund objective, as stated by the regulator, is not tenable. The focus should be on the flexible character of such funds and not on names.
The regulator has given the AMCs two options. These are:
1. Merger of equity multi-cap funds with other funds like large-cap funds or large and midcap funds, and
2. Rebalancing the portfolio based on the 25:25:25
The deadline for complying with the SEBI circular was January 2021. According to experts, most AMCS would follow the first option because rebalancing the portfolio as per the SEBI formula is a herculean task that would also impact the risk-return profile of the funds. The funds may become riskier if the funds have to offload stocks of large companies and invest such funds in mid and small size companies. Investors have options like redemption of units, switching over to another category of fund, stopping SIP (Systematic Investment Plan) investment, waiting for the decision of the AMCs or remaining invested irrespective of the outcome. Investors were advised by the experts to go slow and follow the ‘wait and watch strategy. If the AMCs follow the guidelines mentioned in the circular, offloading of stocks of large companies will be inevitable for many equity multi-cap funds. As a result, there will be a significant drop in the stock price of those companies due to a huge outflow of funds.
Conversely, stock prices of some medium and small companies (where the funds will invest) will witness a big surge because of the inflow of funds. As such, the short-term impact on the capital market is expected to be substantial. Judging the possibility of such impact and the concerns of many investors, fund houses and AMFI came out with the suggestion that a new category of fund with the nomenclature of ‘Flexi-cap Fund’ may be introduced. SEBI accepted that suggestion and notified the launch of the Flexi-cap category of mutual funds on 9th
November 2020. Such funds can invest at least 65% of their corpus in equity and equity-related instruments. Further, the regulator notified that there will be no minimum ceiling of investment across large-cap, mid-cap and small-cap stocks. It implies that the erstwhile flexibility of equity multi-cap funds has been shifted to equity Flexi-cap funds. Now, the fund managers can invest even 90% of the corpus in either large-cap, midcap or small-cap stocks in Flexi-cap funds. It is a welcome move by the regulator. AMCs not desirous of rebalancing their portfolio can simply take the conversion path and convert their multi-cap schemes to Flexi cap schemes. However, it is also argued that there is no need for such a move and without introducing a new category of fund (Flexi cap) the regulator should have changed the name of the existing category of fund (multi-cap).
The number of equity multi-cap funds reduced drastically after the regulatory circular of the SEBI. In December 2020, there were sixty-five (65) equity multi-cap funds. However, in January 2021, the number of equity multi-cap funds was reduced to ten (10) only. It clearly exhibits how the regulatory measure can have an enormous impact on the category of funds. Only two big equity multi-cap funds existed in January 2021. These were Nippon India Multi-Cap Fund and ICICI Pru Multi-cap Fund with AUM of more than Rs. 6,000 crore.
These two funds still survived as of April 2022. Notable amongst the other survivors include Invesco India Multi-cap Fund, Quant Active Fund, Sundaram Multi-Cap Fund etc. One encouraging thing is that many fund houses launched schemes under the category of equity multi-cap funds even after this circular. These are “Aditya Birla Sun Life Multi-Cap Fund”, Kotak Multicap Fund, “IDFC Multi-Cap Fund”s, HDFC Multi-Cap Fund, Axis Multicap Fund and SBI Multicap Fund.
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