Also, a committee has been set up to deliberate holding of liquid assets and methodology of stress testing for mutual funds
It could well be a case of one step forward, two steps back.
SEBI has now introduced a brand-new ‘Flexicap’ equity mutual fund category. This is seen as a move to help fund-houses rebrand and save their Multicap funds — traditionally overweight largecap stocks. Multicap funds were in a flux after the regulator in September directed them to have a minimum 25% exposure to Smallcap and Midcap stocks.
“In order to give more flexibility to the mutual funds and taking into account the recommendations of Mutual Fund Advisory Committee (MFAC), a new category named “Flexi Cap Fund” under Equity Schemes will be available…,” SEBI said in a November 6, 2020 circular.
As per norms, a Flexicap fund will be required to have a minimum 65% total assets in investment in equity & equity related instruments. This is exactly the same definition that erstwhile Multicap funds had. The loose definition — minimum 65% of assets — does not specify investment in any specific sub-limit or cap bucket. So, there is leeway for funds to remain liberal in terms of investment mandate operation. It remains to be seen how many ‘old multicap funds’ follow ‘new multicap fund’ rules, or choose to become ‘flexicap funds.’
Fund-houses can now either launch new ‘flexicap’ funds if they want to launch flexicap fund, or can rename/re-categorize any of existing multicap scheme to flexicap. Remember that if all multicap funds followed new norms mandated by SEBI in September in terms smallcap and midcap exposure, they could have had a theoretical rotation of Rs 11,700 crore from largecap stocks to midcaps and another Rs 23,500 crore to smallcaps by January 2021, according to BofA Securities.
Nilesh Shah, Group President & Managing Director, Kotak Mahindra AMC heartily welcomed the SEBI circular on Flexicap category. “Keeping in mind the potential disruption in existing Multi cap equity funds SEBI has kindly created Flexi Cap category which provides flexibility of allocation to any capitalisation,” Shah said, adding that Rs 30,000-crore Kotak Standard Multicap Fund which is the largest multicap fund in India, will move towards Flexicap category after taking requisite approvals and following due process.
“Except the name of the fund which will be renamed as Kotak Standard Flexi cap Fund, everything else viz. fund manager, investment process and fund portfolio will remain the same as before,” Shah said.
The other large multicap funds (at least Rs 5,000 crore size) are HDFC Equity (Rs 19,398 crore), UTI Equity (Rs 12,473 crore), Aditya Birla Sun Life Equity (Rs 11,443 crore), SBI Magnum MultiCap (Rs 9,340 crore), Franklin India Equity (Rs 8,495 crore), Nippon India Multi Cap Fund (Rs 7,749 crore), Axis Multicap Fund (Rs 6,758 crore), ICICI Prudential Multicap Fund (Rs 5,487 crore) and Parag Parikh Long Term Equity Fund (Rs 5,239 crore).
Meanwhile, SEBI also directed debt funds to have a certain exposure to liquid instruments. “In order to augment the liquidity risk management framework for all open ended debt schemes…All open ended debt schemes (except Overnight Fund, Liquid Fund, Gilt Fund and Gilt Fund with 10 year constant duration) shall hold at least 10% of their net assets in liquid assets. For this purpose, ‘liquid assets’ shall include Cash, Government Securities, T-bills and Repo on Government Securities,” the regulator said.
The liquid assets specified shall not be included for determining the scheme characteristics of the open ended debt schemes. In case, the exposure in such liquid assets / securities falls below the threshold mandated, SEBI said, AMCs shall have to ensure compliance with the above requirement before making any further investments.
While this move is expected to have some impact on debt fund returns since ‘liquid assets’ dont add much, the step will ensure debt funds have assets that can be sold in the event of an avalanche of redemptions.
SEBI had some years ago talked about stress testing of liquid funds and money market fund schemes. Now, based on the recommendations of Mutual Fund Advisory Committee (MFAC), it is decided to mandate all open ended debt schemes (except overnight scheme) to conduct stress testing. So, most debt funds will be covered i.e. stress tested.
“AMC shall stipulate the guidelines to carry out stress testing for the aforementioned debt schemes. A committee has been set up to deliberate…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,” SEBI said.
Think of a stress test as an analysis or simulation designed to determine the ability of a given financial instrument or financial institution to deal with an economic crisis. Stress testing for debt funds will reveal how robust they are in the form of scenario analysis.