SEBI reclassification: What's happening with India's large-cap funds?Some large-cap funds are not classifying themselves as large cap under the new SEBI classification system.  The SEBI category prescribes that large-cap funds must hold 80% of their assets in companies falling in India’s top 100 companies by market capitalisation. Fund houses and investors may be assessing this to be too restrictive. Even those who have accepted the large-cap category are choosing different benchmarks, adding another obstacle to funds comparison.

What’s wrong with the SEBI category?

It is possible that some funds are perceiving the SEBI classification system, which confines 80% of their assets to the top 100 listed companies, as too restrictive. The Sensex includes 30 of these companies in its ambit and the Nifty includes 50. This gives large-cap funds very little room to beat the index –  they must either find winners among the bottom 50 companies in the top 100 or hold companies in different proportions from the index, to generate outperformance.

What’s happening with the funds?

According to RupeeIQ analysis, eight out of India’s 10 largest large-cap funds have announced their responses to the SEBI classification rules. Out of these, five have chosen to be classified as large-cap and restrict their investment universe to India’s top 100 companies. However, interestingly, not all of these five have chosen the same benchmark. Two have chosen the Nifty 100, two have chosen the S&P BSE 100 and one has picked the Nifty 50.

Here are the remaining three. The largest large-cap fund – HDFC Equity has chosen to classify itself as multi-cap and invest in large, mid and small companies. Accordingly, the fund has chosen the Nifty 500 as its benchmark. Kotak Select Focus Fund, the third largest, has also gone down the multi-cap route benchmarking itself to the Nifty 200. Finally, ICICI Pru Value Discovery has chosen to classify itself as a value fund, following a value-oriented strategy. The fund will benchmark itself to the S&P BSE 500.

Interestingly enough, none of the top 10 large-cap funds has picked the ‘large and midcap’ category created by SEBI. This category allows funds to invest 0-35% of their assets in large caps and 0-35% in mid-caps.

No Fund (Old Name) AUM (Rs Crore) SEBI Category Selected Benchmark Selected
1. HDFC Equity 20,381 Multi-cap Nifty 500
2. Aditya Birla Frontline Equity 19,373 To be announced/Not available N/A
3. Kotak Select Focus 17,853 Multi-cap Nifty 200
4. SBI Bluechip 17,724 Large Cap S&P BSE 100
5. ICICI Pru Focused Bluechip 16,102 Large-Cap Nifty 50
6. ICICI Pru Value Discovery 15,881 Value Fund S&P BSE 500
7. HDFC Top 200 14,350 Large-Cap Nifty 100
8. Reliance Top 200 8,825 Large-Cap S&P BSE 100
9. Franklin India Bluechip 7,821 Large-Cap Nifty 100
10. Mirae Asset India Equity 6,775 To be announced/Not available N/A

RupeeIQ Take

It is difficult to say categorically that the top 100 company restriction will hurt performance, going forward. However, the concern remains a valid one and you may wish to choose a fund that has gone down the multi-cap route rather than accept the new category.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.