Teji Mandi: SEBI's new mandate - Will Small & Midcaps finally wake up?

Back in 2018, the Indian market kept touching new highs. But the broader market remained unattached to the rally. Valuations of a few large caps kept increasing. At the same time, non-participation of mid & small-cap stocks kept raising many concerns.

With SEBI's new mandate, the stage finally looks set for mid & small-cap stocks to gain momentum.

What's the new mandate?

SEBI has now mandated multi-cap MF schemes to have at least 25% holding each in large, mid and small-cap stocks. For an investor of a multi-cap fund, this is an important development. Their portfolios are now set to go under a significant churn. It will also reflect on their return profile over the long run.

What's in it for mid & small-cap investors?

Currently, fund allocation in all the major multi-cap schemes is large-cap dominated. Around 74% AUM of multi-cap funds is towards this segment. With new changes, a significant fund flow will divert towards small & Midcap (SMC) stocks.

As per an industry estimate, SMC segment could see ~Rs 40,000 crore shifting from large caps to SMC stocks. As a result, the SMC segment leaders will see a huge rally, in anticipation of huge fund diversion.

Key takeaways:

AMCs are likely to increase exposure in mid & small-cap stocks. Hence, we have a #Teji outlook on the segment. But, the SMC universe carries only a handful of investable ideas. so, huge fund diversion could end up creating a value bubble in this space.

Investors should examine the earning potential and growth prospects of the company. As, in the long run, that will be the only driving factor.

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