Diversification is a must need when it comes to investments to keep your portfolio relevant. It helps you protect your capital and at the same time, reap higher profits.
Mutual funds are known for their diversification and of which, multi-cap mutual funds tend to offer more diversification making it a favorite for many.
Securities and exchanges board of India or SEBI has brought about several changes in the structure of multi-cap funds to make them more diverse and benefit more investors. But how does this change affect multi-cap funds? Let’s take a look at this through this article.
Mutual funds categorization according to market cap
There are numerous ways to categorize mutual funds to make the choice easier for the investor. Categorization based on the market cap is one such method. Here, companies are categorized based on their market cap according to SEBI guidelines. There are three categories accordingly. They are –
These are the top 100 companies in India based on market capitalization. They include the biggest in the business and often have the strongest base. Hence, their stocks tend to have a comparatively stable stock market life. At the same time, they might also lack the ability to rise in price suddenly.
Funds that invest in large-cap funds share these characteristics. Funds that predominantly invest in them are called large-cap funds and they tend to have a stable and steady growth. They tend to be less risky than the other two capitalization categories as well.
These are companies that come from 101st to 250th in the SEBI’s list of market capitalization. They tend to share characteristics of both large and small-cap companies. These are mostly companies that are poised to have greater growth and the same is often reflected in how their stocks perform in stock markets too. Hence, these companies’ stocks could have higher growth potential than large-cap companies’ stocks.
This category has all the companies after the 250th company in the SEBI’s market cap list included. They are a wider category and tend to have higher investment risk but more return potential as well.
Multicap fund offers a mix of companies from the above three categories. They are a more diverse option too. The large-cap composition offers stability while the rest offers higher return potential.
Changes in multi-cap funds composition
The changes that SEBI brought affect the composition requirements of multi-cap funds. Earlier there were no limits in the composition of large, mid, and small-cap shares in a multi-cap funds portfolio. The only guideline was the mandatory 65% equity distribution. But after the amendments, funds need to have a 25% minimum of all the market capitalization categories to be called a multi-cap fund. The minimum equity distribution is increased to 75% as well.
How will the new guidelines help?
SEBI’s new guidelines will primarily help in unifying all the multi-cap funds. It means that there is no underrepresentation of any market cap category, to help it stay truer to its goals. Existing multi cap funds had two ways to deal with the new guidelines. Either they had to restructure their current portfolio so that the news guidelines are met or they can be categorized as a different mutual fund type. For instance, if a fund had a higher large-cap representation and small and mid-cap representations, it can either change its composition or change the categorization. Here, this fund can be categorized as an equity-focused large-cap fund.
Multicap funds are a useful tool to make the most out of the benefits of diversification in your portfolio. Make sure you do your research and choose the right fund.