A Multi-Cap Fund operates as an equity mutual fund which invests in companies that possess various market capitalizations. The fund invests in large-cap, mid-cap, and small-cap stocks. Each category represents a different segment of the equity market. The structure enables the fund to maintain diverse holdings from various market segments.
The Securities and Exchange Board of India (SEBI) established specific allocation rules to maintain the fund’s required asset composition. The rules define the investment distribution requirements which a Multi-Cap Fund must follow. The purpose is to ensure that diversification is part of the fund’s structure.
What is a Multi-Cap Fund
A Multi-Cap Fund is a type of equity mutual fund which operates as an open-ended investment scheme. The fund invests in companies which belong to three different market capitalisation categories.
- Large-cap companies: Ranked among the top 100 by market capitalisation
- Mid-cap companies: Ranked from 101 to 250
- Small-cap companies: Ranked beyond 250
The classification is established by SEBI and undergoes periodic updates.
The structure enables the fund to invest in various company sizes through a single investment framework. The different equity market segments of the portfolio include various segments of the equity market.
SEBI’s Allocation Rules for Multi-Cap Fund
SEBI announced new allocation rules for Multi-Cap Fund schemes in September 2020. The rules establish the methods through which the fund must distribute its financial resources.
The key requirements are:
- At least 75% of total assets must be invested in equity and equity-related instruments
- At least 25% of the overall equity allocation must be distributed to large-cap stocks and mid-cap stocks and small-cap stocks.
The remaining portion of the portfolio can be allocated within regulatory limits.
Why These Rules Were Introduced
Multi-Cap Fund schemes had the ability to allocate their funds as they saw fit before the implementation of these rules. The fund managers had the authority to determine their investment distribution among different market segments.
In many cases:
A large share of the portfolio was invested in large-cap stocks
Mid-cap and small-cap exposure was limited
The fund category and the actual allocation of the fund showed a substantial difference.
The rules were established by SEBI to resolve the existing allocation gap.
The intent included:
- Aligning the fund structure with its category name
- Ensuring representation of all market segments
- Reducing concentration in a single segment
- How SEBI Rules Protect Diversification
Investors need to distribute their investments among different market segments which defines diversification. The allocation rules implemented by SEBI establish guidelines to maintain investment distribution throughout the Multi-Cap Fund.
1. Equal Minimum Allocation Across Segments
The minimum allocation of each segment must be 25% according to the requirement.
This ensures:
- Large-cap exposure remains part of the portfolio
- Mid-cap exposure is always included
- Small-cap exposure is also present
All segments need to be included in the investment framework.
2. Limits on Concentration
Without allocation rules a fund could invest most of its funds into one investment category. This could lead to concentration in a single segment.
The rules reduce this possibility through their establishment of minimum allocation requirements which must be met by each segment.
3. Alignment with Fund Category
SEBI follows a “true to label” approach. Funds need to match their names with their actual funding structures.
A Multi-Cap Fund is expected to invest across market capitalisations. The allocation rules ensure that this expectation is met.
4. Structured Equity Exposure
The rule requiring at least 75% allocation to equities ensures that the fund remains equity-oriented.
The allocation framework specifies the distribution of investments between large-cap stocks and mid-cap stocks and small-cap stocks.
5. Inclusion of All Market Segments
The rules ensure that all three segments are part of the portfolio at all times.
The requirements include:
- Established companies in the large-cap segment
- Companies in the mid-cap segment
- Smaller companies in the small-cap segment
The fund achieves its overall structural framework through each segment.
Impact on Portfolio Construction
The allocation rules affect how portfolios are built and maintained.
Fund managers must execute the following actions:
- They must keep their investments above the designated required levels.
- They need to conduct regular portfolio assessments.
- They must rebalance their investments whenever the allocation proportions experience alterations.
The fund management system follows this framework because it creates a structured approach.
Compliance Across Multi-Cap Fund Schemes
All Multi-Cap Fund schemes must follow these allocation rules.
The existing schemes needed to change their portfolio allocations to comply with the established allocation rules according to SEBI. The schemes needed to switch their funding allocation operations to conform with their approved operational strategy.
The rules create consistent standards that all category members must follow.
Conclusion
A Multi-Cap Fund is designed to include large-cap, mid-cap, and small-cap stocks within one portfolio. SEBI’s allocation regulations establish the criteria which determine the process of including these mutual funds.
The rules require:
- A minimum of 75% allocation to equities
- A minimum of 25% allocation to each market capitalisation segment
The requirements create a defined structure for diversification. The requirements ensure that all segments remain within the framework while the fund maintains its categorization.
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