Head for the exit door if multi-caps get riskier

Act only after your AMC has communicated the fund’s final mandate to you

The Securities and Exchange Board of India’s (Sebi’s) September 11 circular asking multi-cap funds to have a minimum allocation of 25 per cent each to large-cap, mid-cap, and small-cap stocks is set to change the risk and return profile of these funds significantly.

Through a subsequent circular, Sebi has said that fund houses may comply either by switching their unitholders to another category, merging their multi-cap fund with a category like large-cap, or converting it into another category, such as large- and mid-cap.

Sebi wants funds to be true-tolabel. A multi-cap fund, in its view, should have an allocation to all three market-caps, so that even if an uneducated investor buys these funds, he gets what the name ‘multicap’ suggests.

Most multi-cap funds have so far been run as large-cap-plus kind of funds. “Most had a 70:30 (70 per cent exposure to large-caps and

30 per cent to mid- and small-caps) kind of exposure,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.

Investors willing to take more risk than in pure largecaps, but lacking the appetite to invest in pure midand small-cap funds, opted for them.

They were not promoted as aggressive funds. Most did not reduce their large-cap allocation below 65-70 per cent. Only a couple had a 50:50 allocation.

In their earlier avatar, they were go-anywhere funds. “If better opportunities were available in the largecap space, as has been the case over the past two years, they tilted their portfolios in that direction. And if the opportunities were better in the midand small-cap space, they would raise allocation to that space, up to about 30-40 per cent. That is how they earned sound returns and reduced downside risk,” says Vidya Bala, co-founder, Primeinvestor.

Now, if these funds’ mid- and small-cap allocation has to be raised to 50 per cent, the riskreturn profile of most will change. “The new multi-cap fund will have a higher capacity for alpha generation, but will also be riskier,” says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund.

Fund houses will make representations to the regulator. They have until January 31, 2021, to comply. Wait for your fund house to communicate what it plans to do with its multi-cap fund, then check the fund’s new allocation to various market caps and decide whether it still fits into your portfolio.

“If by investing in this fund your exposure to mid- and smallcaps will become too high and make your portfolio riskier than your appetite permits, exit it,” says Bala.

To have better control over their allocation to various market caps, investors may build their portfolios with pure large-, mid-, and small-cap funds. Those who wish to follow an even more simplified approach of investing in the entire market with a single fund may opt for a Nifty 500 index fund. Continue with your systematic investment plan in your multi-cap fund for the present. If its mandate changes, you will get one month to quit without paying an exit load. Try to minimise the tax impact as well at the time of exit.