CLSA, the investment advisory & equities broking firm, has estimated that the Securities and Exchange Board of India (Sebi)’s proposal to drive consolidation of similar mutual fund schemes can lead to Rs 19,300 crore of buying in mid-caps over the next three months. Sebi had in a recent discussion paper suggested that, in the interest of investors, mutual funds undertake a consolidation of schemes with similar objectives to ensure they have only one scheme in a category—multi-cap, large-cap, mid-cap, and so on. This it suggested, would make the task of selecting a scheme for investment easier for the retail saver.
CLSA, which analysed the portfolios of 90% of the domestic equity funds found that only one of the mid-cap schemes presently meets the “mid-cap” criteria with 65% of its portfolio invested in stocks that rank between 101 and 250 on their market cap (market cap of $1.4 billion to $4.4 billion), as defined in the circular. This will require that the other schemes churn their portfolios to reduce large-cap exposure (that has higher weight in most cases) and up mid-cap investments.
However, CLSA warned that the actual impact may vary depending upon how the mutual fund houses effect the scheme mergers to comply with the norms. “Mid cap stocks tend to have a higher risk profile than large-cap stocks. Hence, any change in regulation which proposes to increase allocation directly or indirectly to the mid cap universe will likely result in better returns for an investor, albeit with a higher risk quotient,” said E Prasanth Prabhakaran, senior. president and CEO at Yes Securities.
According to Sebi’s circular issued on October 6, a large-cap scheme should have minimum 80% investment in large caps and a mid-cap fund should have at least 65% of its assets in mid caps.
Sebi said that following the consolidation of schemes, the modified list of mutual funds would be uploaded on the Association of Mutual Funds in India (AMFI) website and the same would be updated every six months based on the data as on the end of June and December of each year.