Imagine a mid-fielder in a football game following his Coach’s game-plan, out-dribbling the opponents a la Diego Maradona, and then with the out-feinted goal-keeper at his mercy, finding that the referee has shifted the goal-post to some other part of the ground. Chances are, he would throw a terrible tantrum and receive a yellow-card at least, if not red.
Well, many investors and their financial advisors, not to speak of Fund Managers and AMC personnel must now be left feeling bewildered like the unfortunate mid-fielder in the above analogy. The reason for their bewilderment is the rather abrupt sweeping change brought about by SEBI in the case of Multi-Cap Funds, earlier this month.
SEBI has asked mutual fund houses to invest at least 25 per cent each in large caps, mid-caps and small caps, in their respective multi cap schemes. The regulator seemed to suggest that the multi-cap schemes were deviating from their mandate by concentrating their investments in large and mid-cap companies. But then, wasn’t it SEBI which in the first place, gave the multi-cap funds the mandate to make secular investments across market caps sans restrictions unlike in the other categories it had demarcated funds into. And not too long ago, mind you.
Multi-cap funds were supposed to be plain vanilla funds where the fund managers could cherry-pick stocks across market-capitalizations sans restrictions. What the new SEBI iteration does is, force the fund manager’s hand. For example, it forces selection of a higher risk carrying set of small-cap stocks in the portfolio even when the market and this segment appears for a decisive correction, while at the same time restricting the quantum of exposure to small-cap stocks that could fly when a bull run commences.
So, who gets protected from what risk in the market and who benefits from this strait-jacketing of fund managers ? Further, if SEBI is going to be pre-deciding the market cap wise allocation too that needs to be made in every scheme, then robots are not the only job redundancy threat that fund managers need to worry about hereon.
And what about those investors who have carefully constructed portfolios based on SEBI’s earlier categorization and have ongoing SIPs and STP’s in multi-cap funds ? Chances are, many of them may simply follow the market adage of ‘exit when in doubt’. SEBI has also issued a clarification that rebalancing the multi cap scheme portfolios is not the only option. Mutual fund houses can also facilitate a switch to other schemes by unit-holders, merge their multi cap scheme with their large cap scheme or convert their multi cap scheme to another scheme category, perhaps large and mid-cap scheme category.
Well, how about simply re-naming these funds Flexi-Caps instead and getting on with business as usual ? You see, the Yanks have a famous saying: ‘If it aint broke, don’t fix it.’ Applies in this case.
Ashok Kumar
heads LKW-India. He can be reached at ceolotus@hotmail.com