On Friday, the Securities and Exchange Board of India (SEBI) announced new portfolio allocation rules for multi-cap equity mutual funds that have made it mandatory for these funds to have at least 75 percent of its asset allocation in equity and equity-related investments compared to the current 65 percent requirement.
Further, the fund will have to invest a minimum of 25 percent of their portfolio each in large-cap, mid-cap and small-cap companies.
"All the existing multi cap funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021," said the SEBI circular.
Since asset management companies (AMCs) will have to lower their exposure to large caps to comply with the rules, analysts expect a rally in small and mid-cap stocks.
Abhimanyu Sofat, Head of Research at IIFL Securities, in a Youtube video posted by IIFL Markets account, said that since most funds currently have minimal investments in mid-caps and small-caps and he estimates the rule change to potentially increase fund allocation by close to Rs 25,000 crore towards small-caps and more than Rs 10,000 crore in case of mid-caps.
"The other change which is likely is that some of these mutual funds may have to change their policy and may have to close down as well," he said.
On the question of what companies could investors look at investing due to change in the scenario, Sofat shared some stock names that could be picked up by mutual funds to increase their allocation.
- AU Small Finance Bank
- Jubilant FoodWorks
- SRF ltd
- Bharat Electronics
- Ramco Cements
- Balkrishna Industries
- Power Finance Corporation
- TVS Motors
- Crompton Greaves Consumer Electricals
Among small-caps, Sofat believes KEC International, MCX, Sheela Foam, IndiaMART InterMESH Ltd, Kalpataru Power Transmission, BEML, Bharat Dynamics, Strides Pharma Science Limited, might see a positive impact.
Sofat said that these names are already on the list of mutual funds and he believes that as it could be difficult to find other small or mid-caps to invest in (as selling these stocks will be difficult in a dull market), AMCs may increase allocation to these existing stocks in their portfolio.