SEBI Releases New Circular To Modify Asset Allocation And Minimum Equity and Securities Compliances, IIFL Predicts Continued Market Rally


The Securities Exchange Board of India (SEBI) on September 11, 2020, released circular _SEBI/HO/IMD/DF3/CIR/P/2020/172, by which they modified asset allocation in respect of multi-cap mutual fund to 75 percent allocation in equities. The alteration was done against the current mandate which is at 65 percent.

SEBI also declared in a circular that they also set a minimum of 25 percent each in equity and associated securities of such large-cap, midcap, and smallcap companies. They also said that along with these, all of the current multi-cap funds will ensure compliance with the provisions within one month from the date of publishing of the next list of stocks by industry body Amfi (Association of Mutual Funds in India). It would be done in January 2021.

The Securities and Exchange Board of India (SEBI) said, “In order to diversify the underlying investments of multi-cap funds across the large, mid and small-cap companies and be true to label, it has been decided to partially modify the scheme characteristics of the multi-cap fund.”

As there is no limitation in respect of allocation, most of the multi-cap funds mobilize most funds into large-cap and residual exposure in mid and smallcap.

Also, this change would not affect funds having asset allocation. This would also not affect smaller assets under management (AUM). The main problem would be for those who need to manage big AUMs. They might also be needed to face some liquidity issues.

Understand the changed rule:

  1. Now, fund managers managing multi-cap schemes invest across market capitalization basis their discretion.
  2. Also, SEBI gave time until January 31, 2021 to the mutual funds companies to comply with the new ruling, within 1 month of AMFI coming out with the list of large, medium and small cap stocks.
  3. Therefore, as the new law is applied, managers will not be able to divert funds of more than 50% into large-cap funds.

Next step for investors?

Actually, as of now, there isn’t any next step. Investors should follow a wait and watch policy for now until fund houses take their decision on whether to comply with the new rules or change the fundamental attributes altogether.

Also if they find out that their fund chooses to change its fundamental attribute to a large or a mid-cap fund it would be best to give it some time while monitoring the funds for at least three to four quarters. However, if the fund chooses to comply with the rules, then it would be best to assess the risk factor.

IIFL predicts stocks that have a chance of rallying:

Abhimanyu Sofat, Head of Research at IIFL Securities, said in a YouTube video that was posted on the social media platform by the IIFL Markets account told that as most of the funds currently have minimal investments in mid-caps and small-caps, he estimated that the rule change would potentially increase fund allocation by close to Rs 25,000 crore towards small-caps and more than Rs 10,000 crore in case of mid-caps.

He added, “The other change which is likely is that some of these mutual funds may have to change their policy and may have to close down as well.”

Sofat also predicted that stocks like AU Small, Finance Bank, Jubilant FoodWorks, SRF ltd Bharat Electronics, Ramco Cements, Balkrishna Industries, Power Finance Corporation, TVS Motors, Voltas, Crompton Greaves Consumer Electricals, REC in the mid-cap range could be the ones that might be picked up by mutual funds to increase their allocation.

He also believes that small caps like KEC International, MCX, Sheela Foam, IndiaMART InterMESH Ltd, Kalpataru Power Transmission, BEML, Bharat Dynamics, Strides Pharma Science Limited, might be up for a positive impact.



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