Mutual Funds May Shift from Large to Mid/Small Caps After SEBI's Guidelines

With SEBI announcing changes to the constitution of multi-cap funds, experts say that mutual funds are now likely to shift from large-cap companies to mid-cap or small-cap companies.

The Securities and Exchange Board of India (SEBI) has said that multi-cap funds will now invest minimum 75 per cent of total assets in equities with 25 per cent each in large-cap, mid and small-cap companies.

At present, the shares of mid and small-cap companies are much lower. Consequently, the need would arise for a major shift by various mutual fund schemes in their allocation to mid and small-cap companies.

A report by Anand Rathi Research said: "Mutual Funds, however, may represent to SEBI regarding changes in the directions and take other measures such as re-classification, an amalgamation of schemes, etc. This might result in lower allocation to mid/small-cap companies than what has been envisaged."

It, however, noted that the emphasis of SEBI to direct mutual funds to conform to the nature of the schemes and reduce the concentration of investing in larger market-cap companies is clear.

"We, therefore, would expect some shift by the MFs from large to mid-/small-cap companies," it said.

Significantly, post the directive came in last Friday, the small and mid-cap stocks on the domestic exchanges have performed better than the large-cap stocks.

Commenting on the market trend on Tuesday, Rahul Sharma, Research Head at Equity99 Advisors said: "Mid and small-cap shares outperformed their larger peers for the second day in a row aftermarket regulator SEBI's circular said that multi-cap funds should invest a minimum 75 per cent of their assets in stocks and mandated equal allocation of 25 per cent between large, mid and small-cap shares."

The BSE SmallCap closed 1.44 per cent higher, and the BSE MidCap was up 0.8 per cent, while the benchmark Sensex settled 0.74 per cent higher.