The Nifty Midcap 100 index surged over 3 percent post the announcement while the Nifty Smallcap index rallied over 5 percent.
Broader markets surged on Monday after market regulator Sebi announced new rules for the multi-cap funds. As per the new guidelines, multi-cap mutual funds will have to make a minimum investment of 25 percent each in equity and related instruments of large-cap, midcap and smallcap companies.
The fund managers have been given flexibility for the balance of 25 percent of the fund.
The Nifty Midcap 100 index surged over 3 percent post the announcement while the Nifty Smallcap index rallied over 5 percent as industry experts estimate the move will see Rs 30,000-40,000 crore moving out of large-cap to midcap and smallcap companies.
The regulator on Sunday clarified that mutual funds have multiple options to comply with the changes in the framework for multi-cap mutual funds. Further, it said that the changes are targeted at ensuring that funds are true to their 'label'.
Among individual stocks, City Union Bank and Syngene surged over 10 percent while Mphasis, Trent, ABFRL, GSPL and BEL rose above 5 percent each in the midcap index.
In the smallcap index, MCX jumped 15 percent to hit 52-week high. VIP, Persistent Systems, Kajaria Ceramics, Century Ply, Can Fin Homes added over 8.5 percent in intraday deals.
"We believe, this is an important announcement by SEBI to increase the depth of the market which will probably help in narrowing the market polarization. This polarization had started immediately after the implementation of SEBI classification in Jan 2018, since then Mid & Small caps are underperforming the large caps, & only a handful of stocks are leading the index higher. This is also visible in the allocation of smart money by mutual funds in which the allocation is skewed towards Large-cap universe only," Axis Securities said in a recent note.
Centrum Broking believes that this regulation change is going to be a game-changer for the Indian markets. "This can be just the impetus needed by the Mid & Small caps. We believe Quality Mid & Small caps can deliver significant returns in the next 4-6 months as most institutional investors will try to comply with this new regulation," it added.
Meanwhile, IIFL Securities cautioned, "This rejig will fuel an intermittent rally in broader markets especially small-cap stocks where more funds need to be allocated, the rally in small-cap stocks may be for short term period but small companies with high-quality management and strong growth outlook may keep witnessing sustainable upturns."