Mr. Jyoti Roy - DVP - Equity Strategist, Angel Broking Ltd
"SEBI has surprised all market participants with its latest circulars wherein multi-cap mutual funds will be required to increase their exposure to mid and small caps stocks to 25% of their AUM by January 2021. Based on our calculations multi-cap funds have almost 74% of AUM allocated to large caps while allocation to mid and small caps are 16.5% and 6.2% respectively. If the SEBI recommendations are implemented then there could be a shift of ~ Rs. 40,500 crore from large caps to mid and small caps on the higher side. Small caps were likely to receive the lion's share of ~ Rs. 28,000 crore while midcaps will also get a lower allocation of ~ Rs. 12,900 on the higher side. This has led to frenzied activity in the small cap space with the small cap 100 index up by almost 5.3% as of 11:05 AM. However we believe that the situation is still fluid and the actual shift could be lower as MF houses are most likely to ask SEBI to reconsider the proposal.
However even if SEBI does not reconsider the proposal then fund houses have the option of either merging it with existing large cap schemes or changing the fund categorization to minimize the impact. Therefore the actual flow to small caps may actually be lower than Rs. 28,000 crore expected by the markets. SEBI has also issued a clarification on Sunday highlighting the various alternatives available to the fund houses to mitigate the impact of the earlier SEBI circular issued on the 11th of September.
We believe that even if there is some shift in allocation to small caps then it will be positive for the high quality small caps names which will see the maximum flows. Also the SEBI circular has brought the small cap space in the limelight and we expect greater interest in the space post the proposed SEBI guidelines. In the small cap space we would recommend investors to stick to high quality companies with strong business franchises. In the small cap space we are positive on Chalet Hotels, Hawkins Cooler, Inox Leisure, JK Lakshmi Cement, Metropolis Healthcare, Persistent Systems, Radico Khaitan and VIP Industries, Swaraj Engines and Zensar Technologies which are part of our recommendations."