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Teji Mandi: SEBI's new mandate - Will Small & Midcaps finally wake up?

06:44 PM Sep 14, 2020 | Teji Mandi

Back in 2018, the Indian market kept touching new highs. But the broader market remained unattached to the rally. Valuations of a few large caps kept increasing. At the same time, non-participation of mid & small-cap stocks kept raising many concerns.

With SEBI's new mandate, the stage finally looks set for mid & small-cap stocks to gain momentum.

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What's the new mandate?

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SEBI has now mandated multi-cap MF schemes to have at least 25% holding each in large, mid and small-cap stocks. For an investor of a multi-cap fund, this is an important development. Their portfolios are now set to go under a significant churn. It will also reflect on their return profile over the long run.

Also Read: Sebi issues clarification on asset allocation framework for multi cap MFs

What's in it for mid & small-cap investors?

Currently, fund allocation in all the major multi-cap schemes is large-cap dominated. Around 74% AUM of multi-cap funds is towards this segment. With new changes, a significant fund flow will divert towards small & Midcap (SMC) stocks.

As per an industry estimate, SMC segment could see ~Rs 40,000 crore shifting from large caps to SMC stocks. As a result, the SMC segment leaders will see a huge rally, in anticipation of huge fund diversion.

Key takeaways:

AMCs are likely to increase exposure in mid & small-cap stocks. Hence, we have a #Teji outlook on the segment. But, the SMC universe carries only a handful of investable ideas. so, huge fund diversion could end up creating a value bubble in this space.

Investors should examine the earning potential and growth prospects of the company. As, in the long run, that will be the only driving factor.

Also Read: Teji Mandi: Three things investors should know on September 14th, 2020

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