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ICICI Securities Report
Multi-cap schemes of mutual funds have an asset under management of Rs 1.47 trillion as of August 2020 with Large, mid and small caps accounting for 74%, 16% and 6% respectively.
The new rules set by Securities Exchange Board of India will entail multi cap funds to increase their holdings in mid and small caps by 9% (Rs 127 billion) and 18% (Rs 270 billion) while reducing their large cap allocation by 24% (Rs 355 billion) over the next five months.
Short squeeze in small/micro caps likely given the higher quantum of buying expected and relatively lower supply.
The situation in our view, however, remains an evolving one, as mutual funds might explore options to reduce the actual impact.
Risk tolerance of Multi cap fund investors will be tested as portfolio risk rises and could impact flows.
Size as a proxy for risk is validated with deteriorating return on equity as we move from Large caps to Micro caps and relatively weaker business models (although with exceptions) thereby resulting in rational investors assigning adequate risk spread over large caps
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