With the new SEBI rules, are Multi-cap funds worth the risk?

Introduction

Multi-cap funds are the result of a diversification in mutual funds, allowing for investing in funds across various market caps. Recently, the Securities and Exchange Board of India (SEBI) has introduced new policies and guidelines for investing in multi-cap funds. As a result, investors have been forced to ponder and reassess the risk of multi-cap funds. This article will provide a breakdown of the newly introduced SEBI guidelines, aiming to assess whether investing in multi-cap funds is still a risk worth taking for investors. 

The new SEBI guidelines

Prior to the revamp, SEBI rules possessed no guidelines or limits for which industry and which segments of the industries multi-cap funds can invest in.  According to the 2017 rules, there existed no market cap-based limits or requirements for multi-cap investment firms. This however, is no longer the case. 

As per new SEBI guidelines, multi-cap funds are now mandatorily required to invest a minimum of 75% of their total assets in the form of equity instruments, and at least 25% is required to be invested across various small, large and mid-cap stocks. Most Multi-cap funds were investing largely in large-cap stocks as getting high returns from mid-small cap stocks has historically been more challenging.  SEBI’s aim in modifying the guidelines for multi-cap funds is to ensure a diversified investment portfolio for the funds, forcing them to live up to the ‘multi-cap’ name. 

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What does this mean for the investor?

The new guidelines pose a number of advantages for those investing in multi-cap funds. Given the new guidelines, investors will know exactly where and how much is being invested by a multi-cap fund, allowing them to make a more informed decision with their investments and reduce the risk of multi-cap funds. 

Currently, all multi-cap funds enjoy what can essentially be described as free reign in the market. They are allowed to choose which companies they wish to invest in, how much they wish to invest in these companies and what percentage of their investment portfolio lies in which sector (large, mid or small cap).  The new guidelines would end up confiscating these luxuries from multi-cap funds, forcing them to maintain a certain dictated amount of investments in each sector. 

There are a number of possible outcomes from the new rules. Multi-cap funds that are not able to succeed and follow guidelines could potentially aim to change their investment fund type and identify as focused fund. If this does happen, investors might be weary of the increased risk of multi-cap funds due to the difficult task of maintaining a high-risk diversified portfolio. 

The second possible scenario is that the multi-cap fund adheres to these guidelines. A detailed understanding of the investment practices and success rates of the multi-cap fund is required to assess whether they will be able to succeed in the mid and small cap segments. If the investor trusts the multi-cap fund, then they might choose to go ahead with their investment. Others might aim to avoid the risk of multi-cap funds, resulting in them no longer investing in multi-cap funds. 

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Conclusion

The SEBI guidelines have caused multi-cap funds and those investing in multi-cap funds alike to reassess their strategies. From an investors point of view, it has increased the study and knowledge required by the investor about the firm in order to make a good investment. These additional steps could be perceived as the result of an increased risk in multi-cap funds. 

Successful investments, regardless of the sector, price or industry, depend on the ability of the investor to study and pick the right stocks to invest in, multi-cap funds or otherwise. If you are looking to invest in multi-cap funds, or a plethora of various other investment options, the Tata Capital Moneyfy app is a one stop shop for investments, helping you compare various Mutual funds and prepare a resilient and high performing portfolio that helps you meet your financial needs and goals.