Small cap/Mid cap Stocks : To buy or not to buy? Way forward for us

Multicap Funds — most diversified equity mutual funds that can put money in stocks across market capitalization.

Sebi new direction for multicap funds– Allocate minimum 25% each in large, mid and small cap by Feb 2021

Purpose : Recently these funds have been found to invested heavily towards large caps and Regulator’s move aimed at reducing risk of concentration in large-cap stocks and making market broad based. This way these funds can be truly labelled as Multi-cap

One quick estimate from a Quantum fund manager shows that 40% of entire MF industry equity investment is concentrated in top 6 large cap stocks thereby posing a huge concentration risk.

Why multicap loaded towards these large caps — to beat the benchmar index which has heavily loaded in these large caps

What all these changes can lead to

Multi cap fund managers to diversify and find opportunities in small and mid cap segment

Selling in Large cap stocks and some of mid cap stocks

Reshuffling of multicap funds portfolios multiple times for diversification and hence estimate is 25K cr will move into mid cap and small cap

Liquidity issues while investing in small caps –some of these small caps will become mid caps just by so much money coming into them and leading into ASM framework or mid caps becoming small caps because of selling pressure

Recategorisation of multicap funds into Large cap MF or Large and Mid cap mutual funds

Merging of few MF schemes into another in same fund house

Will small cap and mid cap stocks rally because of this? Should we buy more small cap and mid cap stocks?

Initial euphoria may drive this rally but retail people should understand the possibilities before putting their hard earned money

  1. AMFI will release a list of Large , mid and small cap on Dec 2020 that will for the basis for this categorization.
  2. Funds can merge into anther fund
  3. Funds can contest this regulation
  4. There could be a crash around the corner because of valuations racing ahead of economy data in many stock counters. So the list of mid and small caps can be entirely different if market correction happens before Dec2020

So any wrong move without due diligence can lead a retail investor into proud owner of junk stocks.

Best way is to own the business what you understand and have conviction. Other things will fall in place for you

Should we sell Multicap funds or buy them?

Stay invested in multi cap funds although one should not be having more than one or two of such category of funds.

Any such funds which will be recategorised as large cap funds will not change your returns much

Any such funds who will reshuffle their portfolio can go through short term pain but returns can be better in long run

Will this regulation stay? and is it good?

I see it as a good regulation because it helps in removing the concentration risk in few stocks from MF industry and as years progresses, this industry is bound to grow by leaps and bounds. This kind of framework helps in longer run although its a big pain in shorter run. It also helps few fund managers to showcase their skills for which we are spending 2-3% of expense ratio. Otherwise we are better off with Index ETF MF with lowest expense ratio if fund managers skills are absent and don’t make any difference to my returns

Happy investing!!

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