Sebi outlines options for MFs on new rules
MANAGERS MAY HELP SUBSCRIBERS SWITCH SCHEMES, MERGE THEM OR CONVERT TO OTHER CATEGORIES
MUMBAI: The markets regulator on Sunday outlined the options available to fund managers to comply with rules on how investments should be spread across assets even as the industry raised apprehensions about the challenges in implementing the new portfolio rebalancing norms for multi-cap funds.
The Securities and Exchange Board of India (Sebi) said it will examine proposals by the industry to ensure managers of multicap funds stick to the mandate of investing substantially across a wide section of firms.
“Apart from rebalancing their portfolio in multi-cap schemes, they could inter-alia facilitate a switch to other schemes by unitholders, merge multi-cap scheme with large-cap scheme or convert multi-cap scheme to another scheme category, for instance, large cum mid-cap scheme,” Sebi said in a note.
On Friday, Sebi directed multi-cap funds, whose portfolios are dominated by large-cap stocks, to keep at least 25% of their assets each in large-, midand small-caps by January 31. Managers said a strict reassignment of assets could trigger massive inflows into mid- and smallcap stocks, reducing the market skew towards large-cap stocks. “Sebi is conscious of market stability and, therefore, has given time to the mutual funds till January 31 to achieve compliance with the circular, through its preferred route of which rebalancing of the portfolio is only one such route,” the regulator added. Amfi welcomed Sebi’s clarification on asset allocation to multi-cap schemes on Sunday and said the industry is committed to following regulations in letter as well as spirit. Amfi will gather feedback from members and revert for non-disruptive execution of multi cap funds portfolio balancing.
Fund managers are planning to petition the regulator about the challenges in implementing the new rules, even as they work to avoid large-scale disruption and keep investors satisfied.
“The Association of Mutual Funds in India will be making a representation to Sebi about the execution challenge of the multicap circular. We are in discussions with members to formulate representation,” an Amfi member said. Fund managers will not buy small- and mid-cap stocks just because there is a circular, this person added on condition of anonymity.
The industry has other options, a top executive at a large fund said. “Alternatives are to merge schemes (multi-cap with large mid-category), change scheme category from multi-cap to flexi-cap, or create a new category of funds so that there is no compromise to investors,” the person said. The rally following the March crash has inflated the valuations of most mid- and small-cap stocks, leaving little choice for fund managers.
From March lows, the BSE Smallcap index has rallied 64% and the BSE Midcap 51%, outpacing the Sensex, which has gained 50%. In 2017, both BSE Smallcap and BSE Midcap indices rallied 60% and 48%, respectively, leading to losses in the following years as stocks with little fundamental support lost steam amid high valuations. At current levels, BSE Midcap is available at 12-month forward price-earnings ratio of 21.75 times, BSE SmallCap at 18.69 while the Sensex is at 21.29 times.