India regulator allows new fund category, soothing industry worries

India's market regulator has introduced a new category of mutual funds that can invest freely across large-, mid- and small-cap stocks, less than two months after a rule change sparked fears that some funds could be forced to reallocate their holdings.

The Securities and Exchange Board of India (SEBI) on Friday announced "flexi cap" schemes that would have to invest a minimum of 65% of total assets in equity and allowed fund houses to rename existing schemes to the new category.

SEBI in September demanded an equal allocation of 25% for large-, mid- and small-cap shares in so-called multi-cap funds that manage assets worth about $20 billion in an effort to make their investments true to the name of the scheme.

That raised concerns the funds would start dumping blue-chip stocks in favour of riskier bets to comply, as some multi-cap schemes had allocated more than 70-80% to large-cap stocks.

It also led to a rally in small- and mid-cap stocks in anticipation of possible big purchases by funds and prompted the Association of Mutual Funds in India (AMFI) to lobby for the new category without restrictions.

Mutual fund houses welcomed SEBI's move on Friday, saying many would simply rename their multi-cap fund to the new category.

"This also would give flexibility to managers to make investment decisions (based on) their conviction on the companies irrespective of their market caps," said Akhil Chaturvedi, head of sales at Motilal Oswal AMC.

Nilesh Shah, managing director of Kotak Mahindra AMC, said its multi-cap fund, the largest such scheme in India, would move to the flexi-cap category after requisite approvals.

"Except the name of the fund ... everything else - fund manager, investment process and fund portfolio - will remain the same as before," said Shah, who is also the chairman of AMFI.