Sebi New Rules On Multicap Funds, should invest in mid and small cap?

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2021 Sebi Rules
Sebi Rules 2021. Financepenny.com

The market is quite volatile. Big Bullish Movement Market has come in these 4 to 5 months. So talk about the latest news about the market. Some new regulations of SEBI have come about multi-cap funds, Let’s discuss…

You may know that earlier, the mid-cap and small-cap performed very well. Around 2017–18, the market was relatively low, then these category stocks were low, and the movement slowed down. And since then people have reduced their investment in these category stocks significantly. Those good Multicap mutual funds were investing a lot of funds in large caps. But, It is not that mutual funds were only invested in large caps. They was also investing in mid-caps and small caps but in minimal amounts (like 5-10% from all investments).

Multicap Mutual Funds Allocations less in MID and Small-Cap’s:

Why are we thinking now that mutual funds are investing low funds in these categories? See, there are many mid-cap and small-cap stocks that are at a good valuation and these category stocks keep a lot of liquidity problems.

Those good Multicap mutual funds were investing a lot of funds in large caps. They were also investing in mid-caps and small caps but less percentages compare to large cap stocks. Hence Mid & smallcap stocks have very low liquidity. Due to the decrease in liquidity, there is a lot of difficulty in buying and selling in the stocks.

Why the changes in Multi-cap Funds:

Most of the funds were invested in large cap stocks by multicap funds. Because of this, funds were not investing much in mid and small cap category stocks. And the liquidity of the stocks was also not increasing also low liquidity was being faced by these categories of stocks due to the low volume.

Most of the investment of Multicap mutual funds is in large caps. Hence, many stocks of large caps are trading at high PE due to high investment and high flow of money.

You can see below the list of investment of multicap funds, how the Multicap funds have been invested in stocks with different allocations.

Fund NameAUM (₹ Cr)% of CategorySmall CapMid Caplarge CapCash
Kotak Standerd Multicap fund29714.0621.751.5322.566.476.97
HDFC Equity Fund19797.9814.483.938.3883.163.66
Motilal Oswal Multicap 35 Fund11239.868.224.6610.0771.95
11.71
Aditya Birla Sun Life Equity Fund11023.348.066.4923.9555.9111.55
UTI Equity Fund10982.948.038.1632.1747.4910.50
MultiCap Funds Allocations

New SEBI Rule On Multicap Funds:

New SEBI rules in Multicap Funds

Many changes have been made according to the SEBI new rules. Multi-cap funds will have to invest 25 percent each in all three categories; For example, Multicap mutual funds managers in this category will have to invest each 25% in stocks. Like 25% in Large Cap, 25% in Mid Cap, And 25% in Small Cap. So now multicap fund managers will have to invest 25% of each allocations in these three categories simultaneously. All this will be implemented by February 2021.

How the SEBI rule impact on Stocks:

According to the new rule, Multicap funds will have to reduce funds (allocation) from large caps and similarly invest in small and mid caps. After reducing the funds from large caps, there will be a lot of fund investment in multi-cap and small caps.

How much funds can be invested in Mid and Small Cap?

Around 27000 cr can be invested in small caps and 13000 cr can be invested in mid caps. So there will be no sudden big move from this, it will take some time for movement and for stocks allotments. Liquidity is low in many stocks and if this money goes in these stocks then you can see a good movement due to increasing liquidity.

If you have bought good fundamentals company stocks, then you have to keep those stocks in your portfolio.

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