Avoid fresh allocation in multi cap mutual funds, say experts

Avoid fresh investments in multi cap schemes — a mutual fund product that bets on a mix of blue-chips, mid- and small-cap stocks. This is what financial planners and mutual fund distributors are advising clients after the capital markets regulator’s new rules for multicap schemes triggered uncertainty over the product’s future.

In the absence of clarity on which multi cap funds will continue being in the category and how the new norms would impact returns, investment advisors are recommending clients to consider other equity categories such as large- and mid-cap funds or focussed funds.

Fund houses yet to disclose plans
The Securities and Exchange Board of India on Friday told mutual funds that multi cap schemes should have at least 25% each in large-, mid- and small-cap stocks by January 31. Till now, there have been no investment restrictions for this product, resulting in many of these schemes holding as much as 75% of their portfolios in large cap stocks, resembling large cap schemes as per Sebi’s classification.

Fund houses running larger multi cap schemes, miffed with the regulations, are considering moving out of the multi cap category as they believe that buying small- and mid-cap stocks to comply with the norms are not in the interests of the unitholders.

With fund houses yet to disclose plans, advisors feel it would be better to stay away from multi-cap schemes, which manage investors' money worth Rs 1.46 lakh crore, or 20% of the industry's equity assets under management (AUM).

“Till there is clarity on how the large funds in this category are going to function, I would avoid putting fresh money there,” said Viral Bhatt, founder, Money Mantra, a Mumbai-based financial planner.

“Small-cap as category has not yet evolved in India as mortality rate is high and companies and managements don’t seem to have homogeneity in aspiration, scale and size,” said Rajesh Cheruvu, chief investment officer, Validus Wealth, owned by LGT, a private banking group owned by the royal family of Liechtenstein. “Very few have the required niche to survive and scale up to the next level. Hence, cherry picking is the rule of game in small-caps.”