Impact Of Sebi’s New Circular On Multi Cap Funds ?

SEBI Circular On Multi Cap Funds which came in on Friday has created lot of excitment in Market Participants and will have  big impact on the Stock Market.  Which are created lot of 

To set some context, in 2017, SEBI 1 had re-categorized all mutual fund categories and strictly defined that universe of stocks by that funds could invest in which led to a Big Fall in Small Caps Index as shown in below chart and almost 2.5 years of Underperforamnce

Below is the Snapshot of SEBI New Circular 

Lets Understand the Impact of the above Circular

What are Multi-Cap funds?

As its name Signify “MULTI” means its invest in Multiple Caps Stocks. Any Fund with  Minimum investment in equity & equity related instruments- 65% of total assets. Rest 35% can be invested in other asset classes – Debt, International Equities, Gold or Liquid funds.

Investors like this category because it could invest anywhere across large, mid, and small caps based on the the fund managers view. And they were quite popular too. It’s the 2nd biggest equity fund category with, 1.29 lakh crores of AUM.

What is the change in today’s SEBI circular?

The equity asset allocation has been increased from 65% to 75% 

  • Minimum Investment In Equity & Equity Related Instruments Of Large Cap Companies-25% Of Total Assets
  • Minimum Investment In Equity & Equity Related Instruments Of Mid Cap Companies -25% Of Total Assets
  • Minimum Investmentin Equity& Equity Related Instruments Of Smallcap Companies -25% Of Total Assets

So a Fund need to Invest Minimum, 50% of  AUM in Small and Mid Caps Stocks and its needs to be done by Feb 2021.

As seen in above chart lot of Multi caps funds have maximum investment in Single Digit in Small cap Stocks so they will need to exit Large Caps and Invest that in Mid and Small Caps Stocs.

As per SEBI rule,

  • Top 100 Companies In Terms Of Market Cap Are Large Caps
  • 101st To 250th Are Mid-caps
  • 251st Onwards Are Small Caps.

Please use this Link to see Stocks based on Market Cap.

So Around Rs 30,000-40,000 cores will  move out from Large Caps Stocks and will be invested in Mid and Small Cap Stocks, So there can be Underperforamnce of Nifty 50 Index and Outerforamnce of Mid and Small Caps Indices.

Money will flow into Small and Mid Caps  stock which are market leader with

  • High Return on Capital Employed ( ROCE)
  • Return on Equity
  • Earning Growth
  • Low Debt,
  • Good and Investor Friendly Mangment
  • Good Corporate Governance.

TOP SMALL CAPS based on above Criteria which can get prefrence

1. TATAELXSI
2. AFFLE
3. KAJARIA
4. STRIDES PHARMA
5. RITES
6. RAYMOND
7. INFIBEAM
8. BAJAJ ELEC
9. AEGIS LOGISTICS
10. GMM PFAUDLER
11. KALPATARU
12. PGHL
13. CENTURY TEX
14. COCHIN SHIPYARD
15. GODFREY PHILLIPS
16. RALLIS
17. INOX
18. EID PARRY
19. GNFC
20. HEIDELBERG
21. STERLING & WILSON
22. LUX
23. CESC
24. TIMKEN
25. MIDHANI
26. DIXON
27. GALAXY SURFACANTS
28. DEEPAK NITRATE
29. PVR
30. CYIENT
31. GRANULES
32. AMBER
33. INDIAMART
34. APL APOLLO

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