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Largecaps unlikely to see sharp correction post Sebi’s tweaks in multicap fund rules: Sunil Subramaniam
Just because smallcap has to be bought, fund managers are generally not going to buy very cheap stocks or ‘aira gaira’ companies, they going to select quality companies, says the MD & CEO involving Sundaram Mutual Fund.
It’s good news for small and midcap investors but there is also not so good news for largecap investors. A person manage both the funds; what is going to you do: Redeem your largecap funds and go to midcap?
I would claim there is good news for the two. And why do I claim this? There is Rs 25,000 crore of additional ease of purchase and sale available for the smallcap part and a little more for the midcap segment. What it means is that traders who were suffering since Dec 2017, in terms of abrasion of NAV in the little and midcap indices, will ease a sigh involving relief. You will see this returns of those funds return back up and fresh inflows coming in because traders look at past returns, whatever you decide to might say. Both the effectiveness of small and midcap resources and the inflows will go right up.
Now, coming to this largecap segment; today, multicap funds on an average invest about 75% to 80% in largecap stocks. They have got to go to 50% now. If you say 25% of largecaps need to be sold then that’s a huge liquid market. 10 stocks out of the Nifty currently have polarised the rally in the index and the equilibrium 40 are at very reasonable value. So, the fund office manager still has a choice as to which largecaps he will offer — the one at a bigger valuation which is a good business in a good sector as well as ones which are waiting to grow. In that sense, ease of purchase and sale in the large cap is not really a problem. If they sell, FIIs can buy. I do not count on much correction in this largecaps.
The second element is of investor behaviour; 20% of the industry is positively managed, roughly about Rs 8 lakh crore happen to be in largecaps, 20% is usually in multicap. 40% with the investors who have put money in largecaps are the models who want the safety and reduced risk-reward ratio.
Those with money in multicaps, happen to be suddenly looking at a 50-50 kind of portfolio from a 75% weightage in largecaps. Often the advisors to those traders are likely to tell customers to switch their money. If you are a risk-averse investor, shift your amount now sometimes into a largecap scheme or even this segment called huge and midcap which has a minimal 35% midcap, minimum 35% largecap. So, when all those flows come in, you will have largecap buying there. So, I do not see a really deep correction in largecaps.
It is not a one-month phenomenon and frankly if Rs 20,000-25,000 crore move into small and midcap companies, there would be a few IPOs, some block deals, promoter hindrances, everything would be there. Nevertheless can that space process this kind of liquidity?
You happen to be right. Today, the smallcap funds are about 6.5% of the industry AUM. So, out of the total Rs 8 lakh crore, 6.5% is about Rs 50,000-60,000 crore. You will be talking about Rs 25,000 crore. Definitely, in this medium term this would stimulate a lot of startups to are available and list because after they list they will start off while using small and midcap space. It might widen it in words of number of players arriving in but in this short run you are going to see a massive spike in prices.
The first bird catches the earthworms; I do not think fund managers are going to wait until January to act. The sooner you get in, the inexpensive you are going to have the same stocks because the ease of purchase and sale starts coming in. It is going to be a enormous uptick for the smallcap part and to midcaps nonetheless overall it is going to broaden the number of companies to list in the market because now mutual resources will be a significant buyer. Whether or not their view is constructive or not, if they currently have a multicap fund they have to have 25% of smallcap companies. This means that mutual funds is going to be now looking at the GOING PUBLIC market, looking to get good companies that are all round very healthy.
The cleverer fund managers would take action early and try and find good companies because in the end that is not going to modify. Just because smallcap has to be bought, they are not intending to buy penny stocks or aira gaira stocks, they going to go for quality firms. Those quality companies are certainly not the entire smallcap space. So, those good companies in the smallcap space intend to get a differential.