Mutual fund investors are calling up their advisors to check whether they should stop their regular investments in multi cap mutual funds until there is some clarity on how the fund houses are planning to deal with the issue of new Sebi norms on multi cap mutual funds. Some mutual fund advisors are indeed asking their clients to hold on to their investments or suggesting other mutual fund categories for regular investments.
The Securities and Exchange Borad of India on Friday came up with new investment mandate for multi cap mutual funds. As per the new norms, multi cap schemes must invest at least 25% each in large cap, mid cap, and small cap stocks. Currently, multi cap funds have the flexibility to invest across sectors and market capitalisations based on the outlook of the fund manger.
The sebi move came after it noticed that most multi cap mutual funds are invested mostly in large cap stocks. The market regulator thinks that these schemes are run almost like large cap schemes that have the mandate to invest around 75% of the corpus in large cap stocks. Most prominent multi cap schemes have more than 70% of the corpus in large cap stocks, with a small exposure to mid cap stocks and very little exposure to small cap stocks.
Mutual fund managers defend their decision saying that the mandate to invest across market capitalisations and sectors offer them the freedom to invest in the current pattern. Most of them are vocal that 25% compulsory investments in small cap stocks would change the basic risk-reward nature of multi cap schemes. Multi cap schemes are typically recommended to moderate risk-takers because of the flexible investment mandate. However, 50% investments in mid cap and small cap stocks would make them highly risky. In fact, more riskier than large & mid cap schemes that have a mandate to invest at least 35% in mid cap stocks.
Mutual fund advisors say mutual funds have the freedom to reclassify the schemes or merge them with an existing category to protect the interests of investors. For example, several advisors believe that some schemes with tight portfolios may classify themselves as focused funds to escape the new norms. Some may also opt for value fund tag or turn into large & mid cap schemes, they say.
However, one thing is clear that fund houses still have not finalised their strategy. Sebi has given them time till February to comply with the new guidelines. That means they have at least four months to finalize their plans. Mutual fund advisors say investors can stop their SIPs in multi cap schemes if they are concerned about the likely extra risk in these schemes because of the new guideline.
Some advisors are asking investors to get back to the drawing board to find out which other category would match their risk profile better. According to advisors, many clients are open to investing in large & mid cap schemes and focused multi cap schemes. Very few showed interest in value schemes, probably because of the poor performance record of the category in the last few years.
Some advisors area asking investors to park the money in liquid or arbitrage funds and wait for the final outcome if they insist on continue with their favourite multi cap schemes after obtaining clarity on the issue.