Oct 10, 2020

In October, 2017 the Securities and Exchange Board of India ( SEBI ) directed to slightly re-categorise and provide a distinct definition to various Mutual Fund schemes launched by different AMCs ( Asset Management Companies). This was done to bring about the desired uniformity in practice and to standardize the scheme categories and characteristics of each category. The schemes are broadly classified as Equity Schemes, Debt Schemes, Hybrid Schemes, Solution Oriented Schemes and Other Schemes.

It was decided to define Large Cap, Mid Cap and Small Cap Funds as :

a.       Large Cap :  1^st - 100^th company

b.       Mid Cap    :  101^st - 250^th company,

c.       Small Cap :  251^st company onwards,  in terms of full market capitalization.

S.No.	Category of Scheme	Scheme Characteristic
1	Multi Cap Fund	Minimum Investment in Equity and Equity Related Instruments - 65% of total assets. Invests across large, mid and small cap stocks.
2	Large Cap Fund	Minimum Investment in Equity and Equity Related Instruments of Large Cap Companies- 80% of total assets.
3	Large & Mid Cap Fund	Minimum Investment in Equity and Equity Related Instruments of Large Companies - 35% of total assets and a minimum of 35% in Mid Cap stocks.
4	Mid Cap Fund	Minimum Investment in Equity and Equity Related Instruments of Mid Cap Companies- 65% of total assets.
5	Small Cap Fund	Minimum Investment in Equity and Equity Related Instruments of Small Cap Companies- 65% of total assets.

                                                                   Source : SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114

 

A very recent decision this year has been to further better define the Multi Cap category. The SEBI found that major AMCs were investing 70 to 80 percent of funds in just shares of large and influential companies. The new rule has prescribed a minimum of 25 percent allocation to large, mid and small cap stocks each giving funds the liberty to use the remaining 25% for any category of stocks. The new restrictions come into play on January 31,2021. There are many who are strongly opposed to the new rule. The AMCs will be forced to reduce their allocation to large cap shares and increase investments in the other two categories. However, the investors will get multi cap scheme in the true sense.

Investors in both lump sum and Systematic Investment Plans (SIPs) should not redeem their corpus or stop their SIP from multi cap schemes. New investors can look for alternate categories like focused funds. In affect, the new mandate will result in a higher allocation of at least 50 percent to the mid and small cap sectors. This will in return increase the risk in these funds. The small cap companies are more susceptible to revenue and profitability risks in an economic slowdown. In fact, fund managers preferred large companies precisely because they offered fewer risks than small and medium players. The reputation of funds as steady providers of good returns is based on how wisely they are invested, and managers felt that large stocks would best ensure that.

This rule can also lead to creating a new category of dynamic equity or equity flexi cap for investors if SEBI permits, wherein the fund manager will have the flexibility to churn the portfolio. On Sep 22,2020 SEBI chairman Mr. Ajay Tyagi has apprised members of AMFI ( Association of Mutual Funds in India) that it was not the intent of the regulator to force the industry to invest in any thing. He stated that AMFI’s representation is being examined and a decision will soon be arrived at.

 

The industry also expects some relaxation and have more time to implement the new rule. Authorities will also have to look into the tax implications. At present, funds with a lock-in period of three years are known as Equity Linked Savings Scheme (ELSS) which provide tax savings under Section 80C of the Income Tax Act.

 

The author of the article is an ex banker and provides Mutual Funds Consultancy at Rudrapur. He is an authorised Mutual Fund Advisor and Distributor registered with the AMFI. Is also a Life Insurance Advisor as well as Health Insurance Advisor. Should always buy insurance directly from IRDA Certified health insurance agents only.

True Money Financial Services also provides demat accounts and share trading through Motilal Oswal Financial Services Limited.