SEBI Announced New Norms For Mutual Funds

SEBI Announced New Norms For Mutual Funds

Recently, SEBI announced a major change in mutual funds investment. Now multi-cap mutual funds have a compulsion to invest 25% each in mid, large, and small capitalization funds. Let us demystify what multi cap, large cap, mid cap, etc are and understand how mutual funds and investors will be impacted by this move.

Crux of the Matter

Before you deep dive into this piece, you can understand the basics of Mutual Funds in a simple jargon-free language here.

Recent Announcement
SEBI made it mandatory for multi-cap Mutual Funds to invest at least 25% of their funds in each small, mid, and large-cap equities. Mutual funds have been told to abide by the new rules by end of January 2021. A multi-cap mutual fund is the one that invests across equities with varied market capitalization, i.e. large-cap, mid-cap, and small-cap. Market Capitalisation = Share price x Number of outstanding shares.

Currently, minimum equity allocation in multi-cap is 65% but as per the new rule minimum equity allocation will also increase to 75%.

Experts say that investors who have already invested in mid and small-cap funds will be benefited. As demand for mid and low cap stocks increases, so will their price. Investors’ holdings in mid and small-cap, thus, can go up due to accelerated buying in mid and small-cap space by the multi-cap funds before January 2021.

Response Strategy
Investors can switch their funds from multi-cap to other equity funds. Mutual Funds can merge/dissolve multi-cap funds with large-cap funds or large-mid cap funds. One can also convert multi-cap to ESG (Environmental, Social, and Governance) funds. By doing so one can maintain the same investment process as well as portfolio quality. ESG funds measure the sustainability and ethical impact of an investment in a business or company in Environmental, Social, and Governance areas. ESG criteria are often preferred by socially responsible investors for investments.

  • An index fund is a mutual fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. The first theoretical model for an index fund was suggested in 1960.
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  • The first modern investment funds were established in the Dutch Republic. In response to the financial crisis of 1772–1773, Amsterdam-based businessman Abraham van Ketwich formed a trust named Eendragt Maakt Magt (“unity creates strength”).