Diversification rule ‘is good for funds’

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The Securities and Exchange Board of India (SEBI) in 2017 had mandated multi-cap funds to allocate its investments to the tune of 65% in equity or equity-related instruments in either large, small or mid-cap funds.

However, the SEBI, through its circular dated 11 September 2020, has altered the allocation requirement of multi-cap funds. They are now required to diversify their investments to the tune of 25% each in large, small and mid-cap funds.

Currently, the investment portfolio of most multi-cap funds is concentrated in either large-cap or mid-cap funds, thereby disregarding the value of small-cap funds. The rigidifying of the investment norms will ensure that the multi-cap funds stay true to their title and invest equally in each of the three types of funds, respectively.

Multi-cap funds like HDFC Equity, Kotak Standard Multicap, Motilal Oswal Multicap 35 and others have most of their investments lying in large-cap funds. The gap in the investments between large-cap funds and small-cap funds is wide, and the new norms will ensure that the existing gap is bridged.

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