Small caps are set for major inflows as markets regulator Securities and Exchange Board of India (Sebi) has prescribed that a minimum of 25 percent each be invested in large, mid, and small-cap companies.
The minimum investment in equity and equity-related instruments will be divided in 75 percent of total assets. The minimum investment in equity and equity-related instruments of large-cap companies will be 25 percent of total assets. Similarly, for mid-cap and small-cap companies, 25 percent each of the total assets will be allocated.
All MFs have to ensure compliance by the first week of February 2021. AMFI will publish the next list of stocks according to market capitalization criteria in January the first week and the compliance has to be within one month of that.
According to a note by Sushil Finance, it is important to note that almost all multi-cap funds are heavy on large caps only.
“This will open up fresh buying in small caps based on data ending August 2020. A staggering 27,000 crore worth of shares needs to be bought in the small-cap space. From Kotak Standard Multi-Cap Fund itself, a mind-boggling 7000 crore worth of small-cap needs to be added,” the research note said.
In the mid-cap space, Rs 12,249 crore of mid-caps will have to be bought.
As per this research, Kotak Standard Multi-Cap needs to add Rs 2,004 crore in mid-caps and Rs 7,077 crore in small caps, while HDFC Equity needs to add Rs 3,288 crore and Rs 4,170 crore, respectively, Motilal Oswal needs to add Rs 2,266 and Rs 2,286 in both these categories, respectively.
In addition, Aditya Birla SL Equity needs to add Rs 127 crore in mid-cap and Rs 2,118 crore in small-cap, UTI Equity Fund needs to pare Rs 227 crore in mid-cap and add Rs 2,145 crore in small-cap, SBI Magnum Multi-Cap Fund needs to add Rs Rs 665 crore and Rs 1,763 crore, and Franklin India Equity needs to add Rs 1,152 crore and Rs 1,557 crore in mid-cap and small-cap, respectively.
JM Financial said in a note, “Based on our analysis of the existing asset allocation of multi-cap schemes (total AUM of Rs 1.4 trillion), 74.2 percent of the total assets were invested in large-cap companies and only 15.8 percent and 5.3 percent were invested in mid-cap and small-cap companies, respectively, as of July.”
Multi cap schemes have time till January 2021 to comply with these revised asset allocation guidelines.
“In our view, multi cap schemes have two options, rebalance existing portfolio which could lead to potential inflows of Rs 131 billion and Rs 280 billion in mid cap and small cap companies, respectively, and merge the existing multi cap schemes with existing large cap/focussed funds and launch a new multi cap scheme.
Market expert Madhusudan Kela said in a tweet, “This is a FANTASTIC move from SEBI and a truly defining moment for the Multi Cap category funds. It will immensely help broad base the current MF holdings and give due recognition to lot of deserving small/mid cap companies.”
“In a fast growing country like India, this will help smaller size companies to tap equity markets for growth funding. Lot of small companies are trading at extremely cheap valuations compared to their true potential,” Kela said.
“Finally, this will bring enormous benefits to lot of small investors who have invested in smaller sized companies and holding for long period in anticipation of true price discovery,” he added.
The move is expected to be help small investors and small companies to get better valuations.
Reacting to the Sebi move, Joseph Thomas, Head of Research, Emkay Wealth Management, said, “At present, the multi cap funds have almost 70 per cent of their allocation to large cap stocks and the balance to mid cap and small cap stocks. The new regulation will make it mandatory that any market cap may have a minimum allocation of 25 per cent, and therefore, to the extent of the excess allocation to large cap mutual funds will have to reduce the allocation, that is, 20 per cent, and move into mid caps and small caps.
“An amount equivalent to Rs 35,000 crore will move out of large caps and will move into mid and small caps. This move will help mid cap and small cap stocks to move up on the light of their share going up in terms of allocation.”
Currently, as of August-end, the multi cap funds have assets under management of Rs 1.46 lakh crore. Experts say that these funds will have to be moved out from large cap stocks where currently the fund holdings are concentrated. It is expected that anywhere between Rs 25,000 crore and Rs 35,000 crore can flow into mid cap and small cap companies.
Most of the multi cap funds are more than 70-80 percent concentrated into large cap stocks.