SEBI NEW REGULATION ON MULTI CAP FUNDS

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SEBI NEW REGULATION ON MULTICAP FUNDS 

 

SEBI has recently strung the MultiCap funds should have 75% of its holding in equities. The 75% should have a composition of a minimum of 25% of Large Cap, 25% of Mid Cap, and 25% of Small Cap. The remaining 25% can be of any equities, gold, debt funds.

Earlier the regulation was to have a minimum of 65% of equity exposure. There were no restrictions in capping between large, mid, and Small Cap companies in a fund.

There are many AMC which hold more than 90% of multicap funds in largecap companies.

 



CHANGES IN MARKET SEBI REGULATION ON MULTICAP FUNDS:

 

The new regulation will have some impact on the market, which will both affect and benefit the retail as well as mutual funds investors.

·       The largecap shares which are more than 50% holdings in multicap funds have to be sold. This will surely make retail investors/FII/DII to purchase Nifty 50 shares at fair and attractive prices

·       The midcap and smallcap funds as to be substituted for the 50% of largecap holdings in multicap funds. This will eventually increase the share price of Mid and Small Cap funds. The investors who hold these shares will be benefited.

·       The price contraction of nifty may or may not occur by the selling of largecap funds. This may lead to a small market correction between 4-6%

·       As Nifty corrects, it may make panic in all the indices. If so happened, the correction can be more than 10% too due to panic selling.

·       It is not that, only AMC will reduce their largecap stocks. Retail investors too sell-off to book profit in the market.

 

Investors should have in their in mind that, these changes are not going to happen over a day or week.

The SEBI has insisted the AMC take corrective measures by January 2021. So, the changes can happen by small steps which will not impact the market as you all think off.

So, it is always advised to wait for the perfect opportunity from the market. Of course, you will get a fine opportunity to buy your favorite largecap stocks.

So, SEBI regulation on Multi Cap funds will not lead to any market crash.

 

Let us have more statistical analysis by AMFI on Multi cap funds August report -2020

 



AMFI MULTI CAP FUND REPORT -2020:

 

AMFI is known as the Association of Mutual Funds in India. This association collaborates the report complete sector of mutual funds and its performance, NAV, and inflow/outflow of cash.

 

Here we are going to look at the report from two angles,

1.    Allocation of various cap funds in the top 20 multicap funds

2.    Statistical Analysis and impact rate in largecap funds.

 

ALLOCATIONS OF TOP 20 MULTI CAP FUNDS:

 

The fund size of AUM size (Asset Under Management) is taken from the AMFI report of August 2020.

The largecap, midcap, and Small Cap allocation data effective values of 11.09.2020.

 

SEBI MultiCap funds - Allocation on 11th September

 

 

As per AMFI August report, the top 20 multicap funds had almost an average of 69.5% of allocation in largecap stocks.

By 11th September 2020, the average allocation of largecap stocks in the top 20 multicap funds is 59.64%.

Almost 10% of largecap stocks have been reduced in the last 11 days, post AMFI report.

 

STATISTICAL REPORT AND IMPACT ON LARGE CAP:

 

Many reviewers over their YouTube has taken this situation and started a panic in the market. What is their standpoint about the SEBI new regulation?

·       This would lead to a market crash, nifty crash, etc.

·       Midcap funds and Small Cap funds will start the rally.

 

What is the real scenario?

As per the AMFI report, a total of all AMC’s multicap fund holdings are 1, 46, 532 Cr.

The total AUM of all AMC’s in the equity mutual funds market is 7, 69, 000 Cr.

 

As per the new SEBI regulation, only a 9.5% correction is needed in Large Cap funds. Which means Rs. 13920 Cr has to be adjusted in largecap towards the Mid and Small Cap.

This 13920 Cr adjustment which requires in largecap is just 1.81% of overall equity mutual funds.

So, the understanding here is,

·       The AMC holding multicap funds should reduce its large ap shares holdings to less than 50%. On average top, 20 funds should reduce 9.5% from current stats (11th September 2020).

·       This will have only a 1.81% impact on the total Equity mutual fund. So, there will be not any market crash due to this reason.

·       There can be a market correction that will be between 4-6% is what expected due to the SEBI new regulation.

·       All the AMC’s having multicap has already reduced their largecap holdings and increased mid and Small Cap shares in September 2020.

If not reducing the largecap shares, the AMC fund managers will have other possibilities to hold their position.

 



THE OTHER OPTIONS OF AMC:

 

1. Converting Multicap fund to largecap fund:

 

As per SEBI guidelines on largecap funds, it should hold a minimum of 80% of its holding in largecap stocks.

So, it is easy for AMC which has more than 70% of largecap holdings in multicap fund to 80% and make it a largecap fund.

So, there is no need to sell largecap stocks, rather they will purchase more.

If an AMC already has a largecap fund, what they will do with the second largecap fund?

 

2. Merging two largecap funds into one:

 

In a case, where an AMC has two largecap funds, they can merge them both and make the AUM size even larger.

This has been done earlier in 2017, where Reliance Largecap and Reliance Mid and Small Cap fund merged to Reliance focused Equity fund. Which is currently Nippon India.

 

CONCLUSION – SEBI REGULATION ON MULTICAP FUNDS:

 

· SEBI’s new regulation on multicap funds will not lead to a market crash or a Nifty crash.

·       There is another 4 months to adopt the change and only 9.5% on average the large caps have to adjust. So, it may have only a small market correction.

·       There was a rally that happened in mid and Small Cap stocks for the last two weeks, so we can’t expect the same rally in the coming days.

·       The change will affect only 1.81% of total equity mutual fund and not on complete equity.

·       Always, wait for the opportunity, and don’t make emotional decisions.


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