In a relief to fund houses, the Securities and Exchange Board of India, or SEBI, has introduced a new category called flexi cap funds which can invest across large cap, mid cap, small cap stocks without any cap on exposure to a particular segment. Flexi cap funds will have to maintain a minimum of 65% allocation to equities.
“It is just back to square one. Flexi cap category should be true to label. At no point in time has the industry has gone below 65% in large caps in their earlier version of multi cap funds. This is not in investor interest. I’m disappointed with this circular. Why should SEBI come out with a circular which mandated multi caps to hold a minimum 25% in large, small and mid caps in the first place? SEBI has given a way out to fund houses,” said the chief executive officer of a foreign fund house.
SEBI has asked fund houses to name the new schemes as flexi cap funds for easy identification by investors. Fund houses have the option to convert any existing scheme, say multi cap schemes, into flexi cap schemes or launch a new flexi cap fund. “Most fund houses will convert their multi cap funds to flexi cap so that they can continue to be managed as per their existing allocations across the capitalisation spectrum,” believes Kaustubh Belapurkar, Director – Manager Research, Morningstar Investment Advisers India.
The new norms come in the wake of recommendations made by the Association of Mutual Funds in India in response to SEBI’s September 2020 circular which had mandated fund houses to invest 25% each in large-cap, mid-caps, and small-cap companies. This restricted the ability of fund managers to manoeuver their allocation based on where they found opportunities. With the introduction of flexi cap category, most fund houses are expected to opt for converting their existing multi cap funds into flexi cap funds.
As on September 2020, multi cap category managed assets worth Rs 1.45 lakh crore across 35 schemes.
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Minimum holding of 10% in liquid assets
To enhance the liquidity risk management, SEBI has mandated all open-ended debt funds to invest a minimum of 10% of their net assets in liquid assets (except overnight, liquid, gilt, and gilt fund with 10 year constant duration). Liquid assets include cash, government securities, treasury bills and repo on government securities. This rule comes into effect from February 1, 2020.
Stress testing norms to be enhanced
SEBI has also mandated all open ended debt schemes (except overnight scheme) to conduct stress testing from December 1, 2020. Currently, liquid and money market funds already conduct stress testing. The norms regarding stress testing were issued in 2015.
The stress testing norms will be updated given the recent scheme of things. So far, stress testing involved only working on scenario of yield change. The industry did not take into account a scenario of huge redemptions. Stress testing is a quarterly exercise done by fund houses.
SEBI has set up a committee to deliberate on the new debt fund norms. The recommendations will be evaluated and based on the same the norms regarding holding of liquid assets and methodology of stress testing may undergo change.
The impact of the move
Fund managers estimate that the yields in open ended funds could fall if they have to hold a minimum of 10% assets in liquid assets.
“We have to redeem the existing assets to redeploy into liquid assets. A back of envelope calculation shows that Rs 80,000 crore worth assets will have to be redeployed to comply with this circular. The yields of open ended debt funds could fall by 5-7 basis point, assuming 10% assets following duration neutral strategy have to be reinvested from corporate bonds to government bonds,” said the chief investment officer of a private sector fund house on the condition of anonymity.
