Mutual funds are gearing up to comply with changes in the categorisation of stocks in schemes based on the upcoming Association of Mutual Funds in India's (AMFI's) semi-annual review of categorisation based on market-capitalisation (market-cap).
As mandated by market regulator Securities and Exchange Board of India (Sebi), the amended list of categorisation of large, mid-and small-caps will be released by AMFI by the first week of July 2019 and will be effective for the second half of calendar year 2019 (H2CY19). Mutual funds will have to re-align the schemes within one month.
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According to a recent report by Edelweiss Research, stocks such as ABB, ACC and Embassy Office Parks REIT could be upgraded to the large-cap category from the current mid-cap. Surprisingly, they also expect Punjab National Bank (PNB) to also make the cut in the large-cap universe.
Likewise, Allahabad Bank, Corporation Bank, Indian Overseas Bank, TTK Prestige and UCO Bank are expected to be moved from the small-cap universe to the mid-cap pack, the Edelweiss report co-authored by Yogesh Radke, Sriram Velayudhan and Abhilash Pagaria says. Newly-listed Polycab India, they expect, could also be moved to the mid-cap pack.
“I don’t think investors need to worry much about this. For a large-cap fund, for instance, 65 per cent allocation has to be to the stocks in the large-cap universe. Even if one or two stocks get dropped, it won’t matter much. So, one does not need to drastically change the portfolio to meet the new classification norms. That apart, there is a compliance provision of one month, which acts as a cushion,” explains Nilesh Shah, MD and CEO, Kotak Mutual Fund.
As per an October 2017 circular, Sebi defined large cap, mid-cap and small-cap companies in order to ensure uniformity in respect of the investment universe for equity mutual fund schemes. As per the classification, the first to 100th company with a six-month average market-cap of Rs 306 billion is classified as a large-cap company; 101 - 250th company with a six month average market-cap of Rs 99.8 billion is classified as a mid-cap company and the remaining (251st) onwards are small-caps.
Page Industries, Indiabulls Ventures, L&T Finance Holdings, SAIL and Ashok Leyland are among the counters, the Edelweiss report says, could be shifted to the mid-cap segment from the large-cap basket; while Dish TV, ICICI Securities, Reliance Infra, Reliance Power, Minda Industries and Dewan Housing Finance (DHFL) could be moved to the small-cap pack from the mid-cap universe.
Analysts say though the churn, per se, should not be a cause for concern for investors, but they do need to align their return expectations from stocks accordingly.
“Retail investors and domestic institutions have not come back to the markets in a big way despite the outcome general elections. The upcoming AMFI churn can create volatility and the stocks seeing an upgrade may see some run-up in prices, while the ones shifted to a lower rung can fall by 3 - 5 per cent,” says G Chokkalingam, founder and managing director at Equinomics Research.
Among the lot, Reliance Anil Dhirubhai Ambani group (ADAG) stocks have been among the worst performers at the bourses in the BSE 500 pack on a year-to-date (YTD) basis till June 11 with Reliance Communications (RCom), Reliance Infrastructure, Reliance Power and Reliance Capital slipping 59 per cent to 89 per cent, ACE Equity data show While the S&P BSE Sensex moved up around 11 per cent during this period, the S&P BSE Mid-cap and S&P BSE Small-cap indices have lost 2.6 per cent and 0.6 per cent, respectively.