The capital markets regulator’s decision last year to reclassify mutual fund schemes to help bring uniformity in investment strategy and asset allocation seems to have made the small cap universe a big casualty, with a bulk of the mutual fund flows going into large and mid caps.
An analysis by domestic brokerage Prabhudas Lilladher has found that between January and June, when mutual fund houses churned their portfolios to comply with the new regulatory guidelines, mid cap and large cap stocks witnessed net buying of ₹14,500 crore and ₹21,900 crore, respectively. The same period saw net buying of a paltry ₹22 crore in small cap stocks.
This assumes significance as the period prior to the churn saw net inflows of ₹5,650 crore in small cap stocks, while large and mid caps reported net inflows of ₹8,170 crore and ₹14,320 crore, respectively.
“Our analysis indicates that small caps bore the brunt almost entirely due to the SEBI circular on mutual fund reclassifications while for mid caps, the subsequent changes to Nifty Midcap index apart from the SEBI circular caused a vast rotation between stocks,” the brokerage said.
Money flows
“Money flows continued into mid caps, while small caps were abandoned and within mid caps, the index exclusions were sold into while the new incoming ones/ones in status quo were bought into substantially,” it added. While SEBI issued the MF reclassification circular on October 6, 2017, the NSE issued a circular on index replacement on February 21, to become effective from April 2. The NSE move led to 46 stocks being replaced in the Nifty Midcap 100 index.
Interestingly, this also explains the rally this year with benchmarks touching new highs even as broader indices are way off their highs touched in January. While the benchmark Sensex has gained more than 12% in the current calendar year, the BSE Midcap and BSE Smallcap indices are down 7.10% and 11.80% respectively.
