The market regulator said multicap funds will now invest a minimum of 75 percent of total assets in stocks with 25 percent each in large-cap, mid-cap and small-cap companies.
“In order to diversify the underlying investments of multicap funds in small, medium and large capitalization companies and be true to the label, it has been decided to partially modify the characteristics of the multicap fund scheme,” said Sebi.
Previously, the required minimum investment in stocks and equity-related instruments was 65 percent of total assets, with no guidelines on how they were distributed across segments.
He said that all existing multi-capitalization funds will ensure compliance with the above provisions within one month from the date of publication of the next list of shares by AMFI, that is, January 2021.
“Traditionally, many multicap funds had a large-cap bias. To comply with the new rules, they will have to reallocate a good portion of their large-cap stake to small- or mid-cap stocks. That will increase the buying pressure on accountants at small cap, which can affect liquidity and pricing, ”said Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India.
You are seeing the reallocation of Rs 40 billion from large-cap stocks to mid- and small-cap stocks. Of this, 13 billion rupees will go to mid-cap stocks and 27 billion rupees will go to small cap stocks.
“This is a significant amount of money that will flow there. Fund managers will need to ensure that they find the right opportunity and manage the investment in such a way that the impact on prices is limited. Finding large blocks is more difficult in small caps, since liquidity is limited, so even execution will be important, ”said Belapurkar.
Sunil Singhania, founder of Abakkus Asset Manager, said that this is an excellent and thoughtful exercise that will broaden the market and make it more balanced.
“Multicap funds by their name and nature should invest in the entire market capitalization. Many mutual funds only used the multicap name, but continued to invest primarily in large caps. It was against the basic philosophy of the fund, ”he added.
A look at the portfolio of the top five funds demonstrated the point made by analysts. As of August, Kotak Standard Multicap Fund which is the largest fund in the category with AUM at Rs 29,714.07 crore has only 1.25 percent in small cap stocks. It has 22.5 percent assets in mid-cap companies and the remainder in large caps. Other funds have a similar bias.
ETMarkets.com“What the market lacked after the categorization rule went into effect was the expansion of the market. Money flowed to the top 10-20 companies. As a result, they were trading at a multiple of 80PE. And nobody was willing to look at the rest of the market, ”said Singhhania. “Small and mid-caps were even struggling to raise the capital that is needed for the business and the economy to grow.”
Joseph Thomas, Head of Research, Emkay Wealth Management, estimates that multi-cap funds have almost 70 percent of their allocation in large-cap stocks and now an amount equivalent to Rs 35 billion will move from large-cap to those of medium and small capitalization. This move will help small and mid-cap stocks rise, he added.
Analysts see a rise in the prices of small-cap stocks. The Nifty Smallcap Index is already one of the best performing benchmarks since markets hit lows in March. It has risen 76.40 percent since then.
“The consequences of the rebalancing of the AMCs would be visible in the equity markets, with the Nifty Small-cap index likely to far outpace buying interest from national institutions in the coming months. Consequently, small-cap mutual fund schemes could indirectly benefit from the Regulator’s new guidelines, ”said Jean-Christophe Gougeon, Director – Investment Solutions, Sharekhan for BNP Paribas.
Analysts believe there will be little to no significant impact on large-cap companies due to money moving, as liquidity is not an issue there.
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