‘Sebi’s Rejig of MF Schemes Triggered Small Cap Rout’

NEW CATEGORIES of schemes and new benchmarks led to fund houses buying more of mid- and large-cap stocks, says a report

The Sebi circular on categorisation and rationalisation of mutual fund schemes led to cash inflows into several small-cap funds drying up in an unprecedented portfolio overhaul, says a research note by brokerage Prabhudas Lilladher. The circular had sought to create uniformity in the mutual fund industry by setting clear definitions of large-cap, mid-cap and small-cap stocks. That would create specific categories of mutual fund schemes, where only one scheme is allowed per category.

Small-cap stocks witnessed net selling of about ?22 crore (January-June). About ? 280 crore was sold in April 2018, while ?140 crore was sold even in June 2018. In the same period, ?21,900 crore worth of large-cap stocks were bought, while mid-cap stocks as per the changed definition reported net buying of ?14,500 crore. The tightening of norms meant that two categories — a new one called large and midcap and the traditional midcap - had to orient themselves more to midcaps and lower their exposure to small caps. A large part of the ?61,000-crore inflow found its way into large caps and midcaps after January 2018, while investments into small caps became virtually nil — unlike earlier when small caps were favoured.

Added to this, the NSE index reclassification meant a large number of stocks exited, replaced by new shares. The NSE Midcap Index specifically saw 46 stocks being removed from the index. So while mutual funds invested into midcap stocks, their attention turned almost entirely to shares that either remained in the index or joined it. Those that exited the index were brutally punished with net outflows. This was a major rotation. Between January–June 2018, the Nifty 50 TRI was up 3.5%, while the Nifty MidCap 100 fell 14% and Nifty Small Cap 100 crashed 21%. According to Value Research, about 30 equity schemes changed their categorisation after the Sebi classification. As per the brokerage house, before Sebi’s circular, mutual funds had a free-hand in deciding the definition of large-cap or mid-cap stocks.

Some schemes defined large caps as all companies with a market capitalisation equal to or greater than the company with the least market capitalisation in the CNX Nifty Index. Some funds defined midcaps as those that are either constituents of Nifty Free Float Midcap 100 Index (benchmark) or companies that have a market capitalisation between the highest and the lowest of Nifty Free Float Midcap 100 Index. From Mid-February until the beginning of June, fund houses began effecting changes to their scheme classification and portfolio allocation to meet Sebi guidelines.

The Economic Times, 21st August 2018