Mid/small-cap stocks rally on SEBI multi-cap norms

Call for caution

Following the SEBI diktat on multi-cap schemes of mutual funds, small- and mid-cap stocks soared though the broader market remained bearish.

Despite SEBI’s clarification that it is open for consultation on its new guidelines, investors rushed to buy small- and mid-cap stocks in the expectation that fund houses will dilute their holdings in large-cap stocks and diversify their investments to meet the new norms.

The BSE Small-Cap Index zoomed 520 points to 15,078 while the BSE Mid-Cap was up 214 points at 14,873 on Monday. The Nifty Mid-Cap 100 and the Nifty Small Cap-100 were up 2.6 per cent and 5.5 per cent, respectively

Last Friday, SEBI had mandated that multi-cap schemes should invest 25 per cent each in large-, mid- and small-cap stocks besides increasing the minimum equity investment of these schemes to 75 per cent of the AUM from 65 per cent. Earlier, there was no such limits based market capitalisation of stocks.

Ankit Merchant, Equity Research Analyst (Midcaps), Reliance Securities, said while the circular is still being interpreted, many feel that the flow into mid- and small-cap stocks will get a boost though many also think that some large multi-cap funds will be merged with large-cap funds.

However, he added that given the sharp run-up in mid- and small-cap stocks since April, investors should remain cautious in stock picking.

Nirav Sheth, CEO (Institutional Equities), Emkay Research, said multi-cap schemes would require to buy ₹28,000 crore of small-caps (3.9 per cent of free float) and ₹13,500 crore of mid-caps (1.35 per cent), to be set off by selling ₹41,100 crore in large-caps (0.72 per cent of free float). But the expected quantum of buying and selling could be impacted should the existing schemes be merged or re-classified, he added.

Most mid- and small cap-stocks have limited free float, relatively lower volumes, and a higher impact cost (both at the time of entry and exit).

Moreover, liquidity issues in small-cap stocks could get compounded in a bear market; when funds face redemption pressure and sell small-cap stocks, the impact cost could be large.

Multi-cap funds with a large AUM may face difficulty in reshuffling their portfolios. Schemes requiring the least reshuffling include multi-cap funds from Invesco, IDFC and Nippon, while schemes requiring the most rejiginclude those of Kotak Standard, HDFC Equity, Motilal Multicap 35, Axis and Canara Robeco Equity diversified fund, said HDFC Securities.