{"id":19352,"date":"2020-09-14T08:00:17","date_gmt":"2020-09-14T02:30:17","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=19352"},"modified":"2020-09-14T10:43:25","modified_gmt":"2020-09-14T05:13:25","slug":"the-great-multicap-rejig-what-should-you-do","status":"publish","type":"post","link":"https:\/\/fundsindia.com\/blog\/mf-research\/the-great-multicap-rejig-what-should-you-do\/19352","title":{"rendered":"The Great Multicap Rejig – What Should You Do?"},"content":{"rendered":"

Unless you are living under a rock, by now, your whatsapp and social media feeds would have flooded you with the latest SEBI announcement on restructuring multi-cap mutual funds. While social media has gone berserk trying to analyze the impact, here is our humble take on the new move.<\/p>\n

The Backdrop<\/b><\/span><\/h4>\n

What happened?<\/span><\/strong><\/p>\n

SEBI on 11-Sep-2020, came out with a new circular to restructure multi-cap funds. As per the circular \u2013 multi-cap funds need to have a minimum 25% in small-cap, 25% in mid-cap and 25% in large-cap by Jan-2021. The remaining 25% can be as per the fund manager’s choice.<\/p>\n

What\u2019s the big deal?<\/span><\/strong><\/p>\n

Earlier, for multi-cap funds there was no SEBI mandated restriction in terms of percentage allocation to large-cap, mid-cap, and small-cap (Note: Top 100 stocks as per market capitalisation are large-cap, 101 to 250 ranked stocks are mid-cap, the rest are small-cap).<\/p>\n

Most multi-cap funds have around 70-80% in large caps and 10-20% in midcaps and 5-10% allocation in small caps as seen below.<\/p>\n\"\"<\/a>\n

So going forward, to adhere to the new rules, multi-cap funds will have to significantly increase their exposure to small-cap stocks to bring it to a minimum of 25% allocation. In case of mid-caps the increase required is not that dramatic as in the case of small-caps.<\/p>\n

Based on data ending Jul-2020, below is the approximate excess amount that needs to be parked in small-caps and mid-caps.<\/p>\n\"\"<\/a>\n

A staggering ~INR 28,000 crs worth of small-cap stocks needs to be bought in the next 5 months. In mid caps, it is far lower at ~INR 13,000 crs.<\/p>\n

Now comes the most important question:<\/p>\n

How does this impact your portfolio and what should you do?<\/span><\/strong><\/p>\n

As we discussed in our earlier post here<\/a><\/em>, at FundsIndia we use a \u2018Thinking Fast and Thinking Slow Approach\u2019 <\/b>to make decisions. Let us see how this approach, as always, helps us this time around…<\/p>\n

Initially, when we read the SEBI announcement on Friday, our initial thoughts went like this…<\/p>\n

THINKING FAST:<\/span>\u00a0<\/b><\/h4>\n

Huge inflows into the small-cap segment:<\/span><\/strong><\/p>\n

The data clearly shows that there is going to be a large inflow of money (~INR 28,000 crs) into the small-cap segment.<\/p>\n

To put that in context, the AUM of the entire small-cap mutual fund category adds up to around INR 52,223 crs. Small-cap funds don’t invest 100% into small caps. They have roughly 71% exposure to small-caps i.e., around INR 36,961 crs (remaining in mid and large-caps)<\/p>\n

The new expected inflows over the next 5 months is a whopping 76% of the total small cap exposure in small cap funds.<\/p>\n

Thinking Fast Conclusion:\u00a0<\/span><\/strong><\/p>\n