Smallcap stocks rally, SEBI ruling pushing broader markets up; time to buy midcap, smallcap stocks?

According to the analysts, multicap funds are among the biggest funds in terms of the number of schemes and AUM within equity diversified funds.

Midcaps have started performing in recent months after underperforming for over more than the two years.

Broader markets including smallcap and midcap stocks outperformed BSE Sensex and NSE Nifty in today’s trade after SEBI’s ruling that multicap funds must invest at least 25 per cent of their corpuses each in large-caps, mid-caps and small-cap stocks. BSE SmallCap index rallied 4.03 per cent or 587 points to 15,145.42, while the BSE MidCaps managed to gain nearly 2 per cent or 286.91 points to 14,946.53. In comparison, the 30-share Sensex was up 325 points and was ruling at 39,178. Midcaps have started performing in recent months after underperforming for over more than the two years. In today’s trade, BSE SmallCap index hit a fresh 52-week high of 15,160.98, surging 76 per cent in just five and a half months.

Will multicap funds rush to buy smallcap stocks? Unlikely

Capital markets regulator Securities and Exchange Board of India (SEBI) on Sunday clarified that mutual funds have many options to meet with the requirements, based on the preference of their unitholders. “We don’t see mutual funds rushing to buy or adjust their strategy sooner as they have various options to mitigate such regulatory risks,” Narendra Solanki, Head of Research at Anand Rathi Shares and Stock Brokers, told Financial Express Online. The current AUM of multicap schemes stands at about Rs 1.3 lakh crore, which is approximately split with about 78 per cent in large-caps, 16 per cent in mid-caps and rest in small-caps.

Should investors jump into the smallcap, midcap pools right away?

After the SEBI ruling, investors are now evaluating if they should invest in midcap and small funds. Omkeshwar Singh, Head of RankMF, Samco Securities, told Financial Express Online that mid-caps and small-caps have had a decent rally for past five months; now, markets have decoupled with the actual state of economy due to excess liquidity in the system, therefore it would be prudent to avoid these funds especially SmallCaps. “In MidCaps there are a few decent funds that can be considered however with caution. There remains uncertainty due to COVID-19, Moratorium NPA judgement by SC and tensions at borders along with the state of GDP,” Singh added.

What happens to investors of multicap mutual funds?

According to the analysts, multicap funds are among the biggest funds in terms of the number of schemes and AUM within equity diversified funds. Investors preferred these funds because it offered flexibility to fund managers to invest across large, mid, and small-cap based on the opportunity. “With a minimum of 25 per cent allocation in small-cap, investors may decide to switch their investments into other categories like Large & Mid Cap or Focused. There could also be a possibility of some fund houses shifting their multi-cap fund to other categories,” said Harshad Chetanwala, co-founder of MyWealthGrowth, a Financial and Wealth Planning Company.

Which is better — FOMO or ‘Wait and Watch’?

Investors eagerly wait to know if there will be still some buying into mid-caps and small-caps after the clarification by the market regulator. Omkeshwar Singh said that it’s better to wait for the actual outcome of the actions of different funds. As indicated, midcaps and smallcaps are already overheated, therefore, one should not speculate and wait for some time to make an informed decision. “Greed for Mid caps and Small caps, and Fear for multicaps to be avoided,” Singh added.

Sebi in its clarification said that apart from rebalancing their portfolio in the Multi-Cap schemes, mutual funds could inter-alia facilitate a switch to other schemes by unitholders, merge their Multi-Cap scheme with their Large Cap scheme or convert their Multi-Cap scheme to another scheme category, for instance, Large cum Mid Cap scheme.