SEBI Circular Dated September 11, 2020
The Securities and Exchange Board of India issued a circular on September 11, 2020 making it mandatory for the AMCs to diversely put Multi Cap Funds in the large, mid and small cap companies equally at 25% each, categorically into equity schemes.
The recent SEBI Circular deals with multi cap fund. Simply put together, a multi cap fund is a fund that is diversely invested into stocks across market capitalization. That is, the money you invest into mutual funds is further invested by the AMC into stocks of the company’s with small, big and large capitalization value.
Now, if the circular sounds completely alien to you, don’t worry. This article will explain you what it means and what will be its impacts on small, mid and large cap companies and on AMCs (Asset Management Company) as a whole.
What is a Multi Cap Fund?
As per the definition, a multi cap fund must include these three – small cap funds, mid cap funds and large cap funds.
By a simple definition, a small cap fund is the fund invested in the stocks of a small capitalization value company; mid cap is the fund invested in the stocks of a medium capitalization value company and large cap is the funds invested into the stocks of a company with large capitalization value.
How the SEBI has categorized companies into small cap, mid cap and large cap, we will discuss in the below heading before discussing the details of the recent circular.
Small Cap, Mid Cap and Large Cap
Initially, each mutual fund company had its own definition of Small Cap, Mid Cap and Large Cap. This has led to customer’s money getting invested in to the shares of companies with large capitalization (Large cap) or the companies listed in TOP 100. Consequently, small cap and mid cap companies started facing liquidity issues.
Therefore, to overcome this discrepancy, SEBI in October 2017 issued a circular, specifically categorizing small cap, mid cap and large cap industries to bring in the balance between investments in these categories. The circular in 2017 categorized small cap, mid cap and large cap as –
Large Cap – The circular defined large cap stocks as he stocks of the first 100 companies in terms of full market capitalization.
Mid Cap – stocks of 101st to 250st company in terms of full market capitalization.
Small Cap – Stocks of 251st company and onwards in terms of full market capitalization.
Now that you are well versed with multi cap fund; small, mid and large cap funds, it’s time that we discuss the recent SEBI circular dated 11 September 2020.
What the 11Sep 20 SEBI Circular States?
As we know already that a multi cap fund must be invested in all the three categories – small cap, mid cap and large cap, but unfortunately this wasn’t the case.
Mutual fund managers were mostly putting your money in buying mid cap and large cap funds at their own discretion. This considerably marginalized the benefits of customers like you and me, not giving the expected benefits.
Let us understand it this way – there are many small cap funds those will become mid cap in the due course of time and likewise there are also many mid cap funds those will become large cap in some time. But when your money is invested only specifically in to large cap funds, you don’t get the expected growth which you have gotten from a diversified investment into all the three categories – small, mid and large cap.
In its 11th September circular, the SEBI seeks to regularize this flaw by equally diversifying 75% of total investment made into equity and related instruments.
The circular mandates that out of 75% of total investment – 25% must be in large cap funds, 25% in mid cap funds and 25 % in small cap funds.
The remaining 25% is a flexible amount that you can invest in any of the three categories as per your will.
In the circular’s clause 2.1, SEBI has also instructed that all the multi cap funds should comply with the norms of the circular within one month of publishing the next list of stock by AMFI (Association of Mutual Funds in India), which would be in January 2021.
Effects on Small Cap, Mid Cap and Large Cap
The circular will obviously benefit small cap and mid cap companies those were performing well, yet were not getting investments as the managers preferred parking the customer’s money into large cap. This in turn will increase the liquidity of small cap and mid cap funds, which is a favorable sign for the investor.
On the down side of it, the large cap funds will see some dip due to the diversification of funds into other categories; therefore, their liquidity is expected to decrease. But the bottom line is that the investments should be in the best interest of the investor that is you.
It is also an attempt to get your asset manager on foot and do some research other than simply parking your fund into a large cap and charging 2% expense ratio.
Many small cap and mid cap companies are going to be benefited with the circular, like, Dixon Technologies Ltd, which is a small cap company and had seen a surge in its stock value from Rs 4000 to Rs 9240 in just six months. After the new circular its stock is expected to rise further. Similarly some companies to invest in are – Aftle India (mid cap), L&T Technologies (mid cap) and Bata India, etc.
Thanks & Regards
Vinay Prakash Tiwari
Investing Daddy
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+919628519650
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