There was a lot of food for thought over the weekend for all associated with the stock markets. SEBI decided to keep everyone busy!

SEBI increased the minimum investment threshold in equity and equity-related instruments held by mutual funds. It mandated that at least 25% of the fund’s corpus should be put in large-caps, mid-caps and small-caps each.

Simply put, if a mutual fund has to invest Rs.1000 – Rs.250 will have to be deployed in large-cap, Rs.250 in mid-cap, Rs.250 in small-cap and balance Rs.250, it will be left to the discretion of fund manager – can be invested in any category or can be kept as cash.

This is a HUGE move by SEBI. The idea behind this is to broadbase the investment horizon, with small and mid-cap companies also getting access to capital.  What we were seeing till now is a very lop-sided market with large-cap companies having PEs which defied all logic while the rest, the market completely ignores. So, these funds essentially called themselves multi-cap but parked majority of their funds only in large-caps.

Now this move by SEBI is going to lead to a huge churn. Most multi-cap funds have parked over 75 to 80% in large-caps; naturally all that will have to trimmed down and re-invested in mid and small-caps. The numbers coming from the industry pegs the funds parked in large-caps to the tune of Rs.96,000 crore while that in mid-cap up to Rs.25,000 crore and small-cap only Rs.14,000 crore. So, almost Rs.22,000 crore worth of shares in the large-cap will see a sell-off while buying frenzy to the tune of Rs.12,000 crore in mid-cap and Rs.23,000 crore in small-cap is expected.

Its not like fund houses have to re-align the fund allocations immediately; they have time till 31st Jan 2021. SEBI has said that the schemes should be complaint within one month of the industry body, Association of Mutual Funds in India, publishes the new list for large-, mid- and small-caps in January 2021.

AMCs are looking at other options to get over this by merging multi-cap funds into large and mid-cap funds – this way they will do away with this ‘multi-cap’ compulsion. Or they are also looking at the option of converting multi-cap into thematic schemes. Last resort, which might really not be the chosen option – close multi-cap funds, giving the money back to the investors. All these “adjustments” would require SEBI approval.

SEBI issued a clarification on these very same lines yesterday late evening saying that mutual funds have many options to meet with the requirements of the circular, based on the preference of their unitholders. It said, “apart from rebalancing their portfolio in the Multi Cap schemes, they could inter-alia facilitate switch to other schemes by unitholders, merge their Multi Cap with their Large Cap scheme or convert Multi Cap scheme to another scheme category.” And yes, this will require SEBI's approval.

So, churning there will be; there is no escaping that. And as usual, the question heard a zillion times over the weekend was, “kya leneka yeh SEBI rule ke baad?” Here goes….

Stocks in small-cap recommended by our Editor, Mr.SP Tulsian:

• Swaraj Engines
• Hester Bio
• Gabriel
• Munjal Showa
• Hikal
• Hind Copper
• Shakti Pumps
• Roto Pumps
• Sarda Energy
• Mahindra EPC
• Aksharchem

Stocks recommended in mid-cap:

• Chola Investment
• Tube Investment
• Alembic Pharma
• Century Textiles
• Shriram Transport
• Dhanuka Agri
• Sundaram Clayton
• Crompton Greaves Consumer
• Atul Ltd
• Gujarat Gas