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Limits on Multi-Cap Fund Investments

  • 12 Sep 2020
  • 3 min read

Why in News

Recently, the Securities and Exchange Board of India (SEBI) has imposed some limits on multi-cap funds.

Multi-Cap Fund

  • Multi-cap funds are those that diversify their investments into all three categories (small, medium, and large-cap).
  • These funds invest by market capitalization of shares.
    • Market capitalization is the aggregate valuation of the company based on its current share price and the total number of outstanding stocks.
    • It is calculated by multiplying the current market price of the company's share with the total outstanding shares of the company.
  • Large cap stocks: Stocks of top 100 listed companies in terms of full market capitalisation.
  • Mid-cap stocks: Stocks of top 101 to 250 companies in terms of full market capitalisation.
  • Small-cap stocks: Stocks of companies above 251 in terms of full market capitalisation.

Key Points

  • Changes Made:
    • A multi cap fund will be required to invest a minimum of 75% of its total assets in equities and equity-related instruments.
      • At present, the rule is to invest a minimum of 65% in equities.
    • Minimum investment of 75% has to be allocated in between large cap companies, mid cap companies and small cap companies, with a minimum share of 25% in each. The rest 25% can be invested as per the investor’s choice.
      • Till now, fund managers of multi cap mutual funds were investing across market capitalisation as per their choice.
  • Reason:
    • The changes have been done to diversify the underlying investments of multi-cap funds across the large-cap, mid-cap and small-cap companies and be true to the label.
    • Currently, the portfolio of most multi cap funds is biased towards large caps with 65% to 90% of their portfolio in large cap stocks.
  • Impact:
    • Fund houses will have to cut their exposure to big cap stocks and invest in mid- and small-cap stocks.
    • This will result in up to Rs. 40,000 crore moving from largecap to broader market (mid-cap and small-cap fund).

Source: IE

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