The market regulator in October came out with a circular on “categorisation and rationalisation of MF
schemes”, in which it has for the first time clearly defined which companies fall in the large-cap, mid-cap
and small-cap categories. It has also set new asset allocation requirements for major categories under equity schemes.
“Our key conclusion is that those conditions will likely lead to Rs 19,000 crore of buying in mid-cap
stocks at the cost of large-caps and small-caps over the next three months,” said Mahesh Nandurkar, India strategist, CLSA.
According to an analysis done by the brokerage, all mid-cap
schemes, barring one, don’t comply with the new rules and will have to tweak their portfolios. These schemes, put together, have assets under management (AUM) worth Rs 71,700 crore.
According to the new rules, a scheme that benchmarks against mid-cap
companies needs to allot at least 65 per cent of the total assets in the mid-cap
segment. For large-cap schemes, at least 80 per cent of assets should be in the blue-chip stocks.
“About 44 per cent of pure equity AUM, which comprises large-, mid- and small-cap funds, would be impacted by the change. To comply with the norms, mid-cap
funds have to make additional purchases worth Rs 19,300 crore in the mid-cap
space. On the other hand, large-cap schemes will need fresh buying of Rs 3,500 crore,” said Nandurkar.
According to CLSA, Godrej Properties, Astral, Jubilant Foods, Arvind and Crompton Consumer
are some of the mid-cap
stocks that could benefit from the imminent churn by equity fund managers. The brokerage says GSK Consumer, Torrent Pharma, Oberoi Realty, AB Fashions and Varun, on which it has a buy rating, could benefit as well.
This move by Sebi
came after fund houses retained investment mandates of a lot of schemes despite the regulator asking them to consolidate. The fund houses have now been asked to stick to six categories of schemes: Equity, debt, hybrid, solution-oriented and others.
has also given a formula to determine which stock falls under what category. While the top 100 stocks by market capitalisation would be considered as large-caps, 101 to 250 will be considered mid-caps. The rest would be small-caps.
The Association of Mutual Funds
in India has been mandated to update the list of stocks in each category on a half-yearly basis: Once in June and then in December. The fund houses will have one month’s time to realign their portfolios.
This buying by domestic fund houses could provide more impetus to the mid-cap
stocks, which have decisively outperformed the benchmark indices this year. During 2017, the BSE MidCap index has gone up 39.2 per cent against 23.3 per cent returns given by the broader Sensex.