Smallcaps rise after SEBI tweaks multicap MF norms

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A recently released circular by the Securities Exchange Board of India (SEBI) calling for changes in assets investments for multi-cap Mutual Funds (MF) made small stocks shoot up in the market on Monday.

The Nifty Small-cap 100 index reached up to 5.2 per cent, which is only 8 per cent away from its pre-COVID peak. The Board had issued a revision in its earlier October 2017 circular on Sunday. Up until now, multi-cap MFs have been investing largely in large-cap funds, making them quasi-large cap funds. However, with new directions, most MFs are now required to diversify their corpus into three funds, viz., large-cap, mid-cap and small-cap companies. Mandating a minimum of 25 per cent of asset allocation in the aforesaid categories, the circular affects nearly 74 per cent of stake where MFs have invested in large-cap funds.

Amidst opposition from mutual fund companies, SEBI also issued a clarification letting companies choose different routes of investments. It stated that companies can allocate assets by rebalancing their existing multi-cap schemes or merge their multi-cap schemes with large-cap funds. Companies are also free to convert their multi-cap scheme to another category. While mid-cap stocks are being preferred by companies, smallcap stocks took a hit in the pandemic. However, SEBI’s recent announcement made smallcap stocks rally in the market. Along with the Nifty small-cap 100 index, the Bombay Stock Exchange’s (BSE) smallcap and midcap indices also witnessed a hike of around 2 per cent and 4 per cent respectively. For the BSE smallcap index, the rally resulted in a 17-month high.

SEBI’s objective for referring changes in the assets management is identified as a push for investors to small-cap and mid-cap funds which struggled during the COVID pandemic.

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