Largecaps unlikely to see sharp correction post Sebi’s tweaks in multicap fund norms: Sunil Subramaniam

Just because smallcap has to be bought, fund managers are not going to buy penny stocks or ‘aira gaira’ stocks, they going to go for quality companies, says the MD & CEO of Sundaram Mutual Fund.

It’s good news for small and midcap investors but there is also bad news for largecap investors. You manage both the funds; what will you do: Redeem your largecap funds and go to midcap?
I would say there is good news for both. And why do I say this? There is Rs 25,000 crore of additional liquidity available for the smallcap segment and a little more for the midcap segment. What it means is that investors who were suffering since December 2017, in terms of erosion of NAV in the small and midcap indices, will now ease a sigh of relief. You will see the returns of those funds go back up and fresh inflows coming in because investors look at past returns, whatever you might say. Both the performance of small and midcap funds and the inflows will go up.

Now, coming to the largecap segment; today, multicap funds on an average invest about 75% to 80% in largecap stocks. They have to go to 50% now. If you say 25% of largecaps need to be sold then that is a huge liquid market. 10 stocks out of the Nifty have polarised the rally in the index and the balance 40 are at very reasonable valuation. So, the fund manager still has a choice as to which largecaps he will sell — the one at a higher valuation which is a good company in a good sector or the ones which are waiting to grow. In that sense, liquidity in the large cap is not a problem. If they sell, FIIs can buy. I do not expect much correction in the largecaps.

The second aspect is of investor behaviour; 20% of the industry is actively managed, roughly about Rs 8 lakh crore are in largecaps, 20% is in multicap. 40% of the investors who have put money in largecaps are the ones who want the safety and lower risk-reward ratio.

Those who have money in multicaps, are suddenly looking at a 50-50 kind of portfolio from a 75% weightage in largecaps. The advisors to those investors are likely to tell clients to shift their money. If you are a risk-averse investor, shift your amount now either into a largecap scheme or this segment called large and midcap which has a minimum 35% midcap, minimum 35% largecap. So, when those flows come in, there will be largecap buying there. So, I do not see a very 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 stocks, there would be some IPOs, some block deals, promoter blocks, everything would be there. But can that space absorb this kind of liquidity?
You are right. Today, the smallcap funds are about 7.5% of the industry AUM. So, out of the total Rs 8 lakh crore, 7.5% is about Rs 50,000-60,000 crore. You are talking about Rs 25,000 crore. Definitely, in the medium term this would encourage a lot of startups to come and list because when they list they will start off with the small and midcap space. It could widen it in terms of number of players coming in but in the short run you are going to see a massive spike in prices.

The early bird catches the worm; I do not think fund managers are going to wait till January to act. The earlier you get in, the cheaper you are going to get the same stocks because the liquidity starts coming in. This is going to be a huge uptick for the smallcap segment and to midcaps but overall it is going to broaden the number of companies to list in the market because now mutual funds will be a significant buyer. Whether their view is positive or not, if they have a multicap fund they have to have 25% of smallcap stocks. This means that mutual funds will be now looking at the IPO market, looking to take good companies that are overall very healthy.

The smarter fund managers would act early and try and get good companies because ultimately that is not going to change. Just because smallcap has to be bought, they are not going to buy penny stocks or aira gaira stocks, they going to go for quality companies. Those quality companies are not the entire smallcap space. So, those good companies in the smallcap space are going to get a differential.

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