Sebi's new MF rule will lead to forced inflows into mid and small-caps, says HDFC Securities; lists top picks

Market Regulator Sebi announced new rules for the multi-cap funds. As per the new guidelines, multi-cap mutual funds will need to invest a minimum of 25 percent in Large, Mid and Small Cap stocks each. The fund manager has been given flexibility for the balance of 25 percent of the fund.

Multi-cap funds will have to allocate at least 25 percent of their AUMs in mid and small-caps each by early February 2021. HDFC Securities, in a recent report, noted that this has come as a surprise, given the large AUMs currently under the multi-cap category.

Smallcaps and midcaps have been under pressure for over 2 years since the IL&FS crisis. Even the sell-off during the COVID pandemic witnessed may smallcap and midcap stocks falling to multi-year lows with most investors opting for safe largecap. But since July a glimpse of recovery was seen in the broader markets as they continued to outperform the benchmarks.