Changes to Multi Cap Mutual Funds by SEBI

The recent rule on expecting Multi Cap Mutual Funds to invest minimum 25% in each of the Large Cap, Mid Cap and Small Cap, is one of the worst rules that is brought by SEBI in the recent time. 

Post 2017, Multi Cap Mutual Funds is the only category, where AMCs have full freedom to invest in any stock. With this restriction, SEBI is curbing that freedom of AMCs. After this rule, there is no category, where AMCs have full freedom to invest in any stock. 

Not only SEBI is restricting the freedom of AMCs, it is forcing the investors to learn about Market and keep track of that. We can no longer just blindly trust AMC and invest. Before this rule, if any investor wants to invest, and if they trust on any AMC and they don't have any knowledge on anything else, they can just go with Multi Cap Mutual Fund of that AMC. With this restriction, they need to decide whether to invest in Large Cap, Mid Cap or Small Cap and change the investments based on the market. When AMC has freedom to change the investments, they can do it on behalf of the investors.

Another reason that is mentioned in the media is, the investments in Multi Cap Mutual Funds are like either Large Cap or Large & Mid Cap or one of the existing schemes. So, there is no need for another category. I don't know whether this reason is given by SEBI or not. This reason may look correct for those who are doing day trading or have very small duration for their investments. But, it won't work for those who are doing investments for the long term.

When freedom is given to AMCs, they may invest in the stocks that are going to perform better. When they do that, most of the time, that would match with one of the categories defined by SEBI. But, in a couple of years, when the market is changed, and if they think, other category stocks are going to perform better, the AMC may shift their investments to the other category. At any time, the Multi Cap may match with one of the categories, but, the main difference is, changing their investments based on the market from one category to another category. That basic freedom is removed from AMCs.

If SEBI wants, it can create a new category with this rule and let AMCs use the new category, if required. Or it can keep the present rule, but create a new category where the AMCs get full freedom on whichever stocks they want. 

In 2017, SEBI restricted the number of categories, forcing AMCs to offer only the basic categories and reduce the redundant categories. With this rule, Multi Cap is going to violate the principle that it had set. After this rule, instead of investing in Multi Cap, they can invest 1/3rd of that amount in each of the Large Cap, Mid Cap and Small Cap. If AMC is following the principle of having minimum strategies, then the return of the Multi Cap is exactly going to be the average of Large Cap, Mid Cap and Small Cap. Then, why do we need the Multi Cap category at all? We can remove that. 

In the same way, the Large & Mid Cap fund category is also redundant, because the AMC is forced to invest a minimum 35% in Large and 35% in Mid Cap. If the AMC has freedom to invest in any stock of Large & Mid Cap with 70% limit, then that category is of some use. But, with the present rule, investing in Large & Mid Cap is exactly the same as investing half of the investment in Large and another half in Mid Cap. 

I am not worried about the Large & Mid Cap fund, because it is just another redundant fund. What I am worried about is, removing the only category that was giving freedom. 

Before 1991, few officers in the government used to decide the IPO price. Everyone knows how bad it is for the stock market. This rule is also going in that direction, where few government officers are deciding what people need. 

All this may go in deaf ears, if there is some hidden reason for bringing this change. For example, if SEBI brought this rule to increase investments in Small Cap and Mid Cap, then irrespective of the correct logical reasons, this rule might not be changed. If there are hidden reasons like that, it is going to harm the country. 

"It will be a folly to ignore realities; facts take their revenge if they are not faced squarely and well." - Sardar Vallabhai Patel