As an investor in a multi-cap fund, you could be feeling really confused about the uproar caused by the 11 September 2020 Sebi circular on making these funds more ‘true-to-label’. What happened is this: the circular changed the earlier rule of allowing a multi-cap fund to invest across market caps as they liked and has put in minimum limits across market caps. A multi-cap fund, from February 2021, must have a minimum of 25% in large-caps (defined as the first 100 stocks by market cap), 25% in mid-caps (101st to 250th stock by market cap) and 25% in small-caps (251st stock onwards). The rest of the 25% can be invested in any of the above three categories, technically allowing a 50% large-cap exposure in a multi-cap fund. You can read the circular here.
The upset is because multi-cap funds will now be forced to invest into the small-cap market, reducing the elbow room available with the funds to manage as they liked. There are three things that you as an investor need to consider before you get caught up in the hysterical outpouring seen last week about this circular. One, financial products are invisible. It is in their description they are created in the minds of investors. Therefore, product labels are very important in an industry that manufactures and sells products that are invisible and whose moment of truth is not immediate, but far in the future. The moment of truth of another invisible service like a mobile data plan is at once. A physical product like a plate of sushi is also immediate. But an equity-linked investment will by its very nature have its moment of truth in the future. Put these two things together and you need mutual fund labels to describe correctly what the investor is buying. Calling a credit risk fund, a credit opportunity fund is a sleight of hand to make risk sound like an opportunity. It has taken a lot of internal push to get the industry to agree to call a ‘risk’ a ‘risk’ and not an ‘opportunity’.