HDFC Securities: Small And Mid-Caps  - Wind In Their Sails

HDFC Securities Report

Securities and Exchange Board of India’s circular mandating multi-cap funds to allocate at least 25% of their assets under management in mid and small-caps each by early February 2021 has come as a surprise, given the large AUMs currently under the multi-cap category.

We believe some of the large multi-cap fund schemes might opt to reclassify into (or merge with the existing) ‘large and mid-caps’ category, given the difficulty of managing sizeable AUMs with a high proportion of relatively less liquid Indian mid and small-caps.

However, this mandate would still lead to forced inflows into mid and small-caps over the next four months, especially smallcaps, given the sizeable gap between existing and proposed holdings across most schemes.

As per current holdings and no scheme reclassification, this shift would lead to an outflow of approximately Rs 350 billion from large caps (top 100 stocks by market capitalisation) and inflows of approximately Rs 130 billion into mid-caps (next 150 stocks), and approximately Rs 280 billion into small-caps (beyond the top 250 stocks).

As per our analysis, these inflows would amount to approximately 1.2% of total free-float of mid-caps and a whopping approximately 7% for small-caps.

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