Will Sebi's new rules for multi-cap funds fuel rally in midcap, smallcap stocks?

Multi-cap mutual fund schemes may have to churn their asset allocation to reduce the weight of largecap stocks in their portfolio and raise their mid and smallcap holdings.

Business Desk, ETV Bharat: Stock market regulator Securities and Exchange Board of India (Sebi) took the mutual fund industry by surprise over the weekend when it announced revised guidelines for investments of multi-cap funds across mid and smallcap stocks.

As per new rules, Sebi has proposed raising the minimum investment in equities for multicap funds to 75% of assets from the earlier 65% along with minimum investment of 25% of total assets each in largecap, midcap and smallcap stocks.

Sebi said the step has been taken in order to diversify the underlying investments of multi-cap funds across the large, mid and smallcap companies and be “true to label”.

The move can result in a churn in asset allocation by multi-cap funds as data shows that they have made higher allocation in large cap stocks, mainly because such scrips offer higher returns and are relatively less risky, especially when the economy is facing a financial crisis.

“As per our calculations, multi-cap funds have a total AUM (assets under management) of Rs 1,46,500 crore with almost 74% of AUM being allocated to large caps, while allocation to mid and small caps are 16.5% and 6.2% respectively,” brokerage firm Angel Broking said in a report.

If the Sebi recommendations are implemented, then there could be shift of Rs 40,650 crore from largecaps to mid and smallcaps on the higher side, the report added.

No wonder, the S&P BSE Midcap Index rose as much as 2.3% in intra-day trade on Monday, while the BSE Smallcap index jumoed 4.3% in anticipation of better inflow in these stocks in coming months.

Not all mid, smallcaps may benefit

Analysts, however, believe that Sebi’s revised guidelines will only benefit qualitative mid and small cap stocks which already have a place in mutual funds’ portfolios.

“We believe that flows would go the most liquid names in the small cap space where there are reasonable MF holdings rather than in smaller name with low liquidity and fund holdings,” said Jaikishan Parmar, equity analyst at Angel Broking.

Moreover, since the funds have time till February 2021 to change allocation, buying in midcap and smallcap stocks could be more spread out, which might not result in any knee-jerk rally in this space, added Parmar.

Actual shift in allocation could also be lower as fund houses have been given various options to meet requirements of the Sebi circular based on the preference of their unit-holders.

Sebi on Sunday clarified that apart from rebalancing their portfolio in the multi-cap schemes, mutual funds could facilitate switch to other schemes by unit-holders, merge their multi-cap scheme with their large-cap scheme or convert their multi-cap scheme to another scheme category.