SEBI's New Multi-Cap Mutual fund Rules: Detailed Analysis
Before a few days, SEBI released a new notification related to multi-cap mutual funds.
It says that multi-cap mutual funds will have to change their allocation.
After which certain rumours started doing rounds, there were YouTube video predicting that the market might crash, cause of this particular notification.
Let's discuss this particular notification in detail and its implication on you as an investor and the industry.
Let's start with today's article on Sebi's new notification.
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Let's start with today's article!
what are multi-cap mutual funds?
You might know this if you invest. If not, let me explain it for you. Equity Mutual Funds invest in different equities. There are three types of equities or stocks in which you can invest Large Cap stocks, Mid Cap stocks and Small Cap stocks. These are different categories of stocks according to their size where Mutual Fund invests. If I talk about Large Cap mutual funds here, they invest more than 80% of their money in large-cap mutual funds.
Similarly small-cap and mid-cap mutual funds. There is a different category here: Multi-Cap Mutual Funds. Multi-Cap Mutual Fund is a category of mutual funds, which entails all three categories in one. Multi cap funds can invest in either of the three funds, Large Cap, Mid Cap, Small Cap depending on the situation and the market scenario.
Talking about Asset Under Management, Total AUM which is invested in multi-cap mutual funds is around. Rs 1.4 lakh crore which is big in no. But if we go in-depth, we can notice that most of its recent allocations are in Large Cap stocks because you know the market scenario was not good in recent times. Many stocks were going down. Cause of which they allocated more in Large Cap stocks.
Till now, the regulation was to invest 65% AUM in any stocks. They never used to allocate percentages on how much should be allotted to Mid Cap, Large Cap, Small Cap. SEBI Regulation stated to keep their 65% AUM invested in Equity.
The rest of the money can be kept in the form of cash so that if you get an opportunity in the market, you can invest there. Now according to SEBI's new regulation, 25% allocation should be done in Large Cap. Another 25% in Mid Cap and the next 25% in Small Cap.
Now, if say, most of their allocation is in Large Cap stocks, in order to comply with SEBI's new regulation, they will have to remove tier allocation from Large Cap and allocate it in Mid Cap and Small Cap. But people are worried if multi-cap will take out their allocation from large-cap and start investing in small-cap then large-cap stocks will start barging down.
Let's talk about the reality of this situation.
Let's see the percentage of AUM invested in Large Cap, Mid Cap and Small Cap to know how much quantum will be reallocated. As you can see on the screen total AUM allocation of this industry is around Rs 1,42,000 Cr Out of which, 74% of the stocks are in Large Cap. Its quantum is Rs 1.05 Lakh crores, 15.78% of the stocks are allocated to Mid Cap. Its quantum is Rs 22,500 crores, 5.34% allocation is there in Small-Cap currently. Its quantum is Rs 76 crores. You might have understood the highest allocation of multi-cap mutual funds was in Large Cap mutual fund.
Now to comply according to the new regulation, 30%-40% will have to be withdrawn from the Large Cap and invested in the Mid Cap and Small Cap so that they can have an equal 25% in all categories.
Now you know that while reallocating money would flow from Large Cap to Mid Cap and Small Cap. The biggest misconception here was if the market will crash because of the same. When I talk about Rs 30 or Rs 40 crores and compare it with the total AUM of large-cap funds or total aum of the industry. This no. of so small in comparison, that forgets about the market getting crashed but there won't even be a material impact on any of the stocks in that category.
SOME EXAMPLES
I will try to explain it to you with a small example. Talking about the biggest 2, 3 large-cap companies in India, their market capitalization is 3 to 4 lakh crores. I am talking about this market capitalization for the top 2,3 firms in India.
If in that 30,000 crores to 40,000 crores will be removed from the top 100 firms, still it would not leave any impact. As an investor, thinking of this new regulation, I wait till Jan to invest cause the market might crash. This thinking is entirely wrong. This impact, as I told you statistically, is very small to make any material impact. Not investing because of this speculation is wrong.
If you are planning to trade on the basis of the impact of this new regulation that thinking can be wrong as well as it can increase the chances of you making a loss. Talking about the timing before which the mutual funds need to comply with the new regulation, then many months are left. If you see the outflow of any mutual funds in any months, then this no. is pretty big.
By that no. you will understand that this no. isn't big enough to bring a crash in the market. Other than that, SEBI has mentioned in its circular that if there are mutual funds of the multi-cap category. They can increase their allocation in the Large Cap and reclassify themselves from multi-cap category of mutual funds to large-cap category of mutual funds.
Mutual fund from the multi-cap category.
Say if there is a mutual fund from the multi-cap category, its allocation is of more than 70% in large-cap. They have thought in the coming times, they won't be allocated to the small-cap cause they feel, it won't be good for the investors to remove money from the large-cap and invest in mid-cap.
Mutual Funds have another option to increase their allocation in Large Cap and classify itself from multi-cap mutual funds to large-cap mutual funds. There are 2 to 3 options available for the mutual funds. We will get to know in the future which plan of action each mutual fund will take.
If you have invested in the multi-cap mutual funds, you are panicking cause it might become large-cap. Your mutual funds will clearly give you a notification if it is going to change its allocation. Don't get worried about it cause every mutual fund thinks about its investors first and then take an appropriate investment decision.
This article is purely based on educational purposes the reason for this article was to simply advise you to not speculate over such rumours by watching certain youtube videos or there would be people discussing a market crash cause of this new regulation.
Like I told you this, no. is really small to bring a material impact in the market if in case it is taken out as well. If you are trading on this basis, please don't. If you planning to invest, please go ahead without any tension.
Do your own research and choose a mutual fund or a stock?
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