Can you please tell me whether I can expect some big buying in mid cap and small cap stocks due to the SEBI circular on multi-cap funds?

On Friday when SEBI announced the changes in multi-cap composition, there was quite a furore created. SEBI stipulated that multi-cap funds must have a minimum of 25% each invested in mid caps and small caps. Here are some things to understand.

· Markets are expecting a Rs.40,000 sell-off from large caps and an equivalent buying into mid caps and small caps. However, this may not exactly happen.

· Mutual funds are looking for various alternatives to avoid this kind of basket selling of large caps and basket buying of small and mid caps; where liquidity is a major concern.

· One option in front of mutual funds is to merge multi-cap schemes with large-and-mid cap schemes, where there is greater leeway for allocation.

· Another option is that such multi-cap schemes can be converted into thematic schemes that do not have any such restrictions. However, that may impact retail demand.

· The third option is inter-scheme transfer of stocks, with the mid-cap stocks being partially re-allocated to mid-cap fund and so on.

· MFs also have the option of renaming the multi-cap funds as flexi-cap funds which are more dynamically managed and do not have such restrictions on asset mix.

· AMFI’s Nilesh Shah has clarified that funds have time till end of Jan-21 to implement this change, so any strategy response will be calibrated and thought through.

In a nutshell, it does not look like there could be a rush to buy mid cap or small cap stocks so investors should not count too much on that kind of sentiments in the market.