Spike in volatility in 2020 could spur significant changes in MF stocks

Topics Mutual Funds | MF schemes | mcap

The spike in volatility this year could spur higher-than-normal changes to stocks in the large-cap, mid-cap, and small-cap categories of equity mutual funds (MFs). The benchmark Sensex has swung 65 per cent — touching an intra-day high of 42,273 in January and low of 25,639 in March — this year, the most since 2008.

The broader market-focused mid-cap and small-cap indices, too, have seen similar swings. Depending on changes to half-yearly market capitalisation (m-cap), stocks fall into one of the three categories — large-cap, mid-cap, or small-cap.

An analysis done by Edelweiss says the mid-cap universe — comprising firms that rank 101-250 in terms of m-cap — could see as many as 17 new stocks move out. Similarly, over half a dozen stocks could exit the large-cap universe, which is defined as the top 100 entities in terms of m-cap.

Piramal Enterprises, ACC, ABB, REC and Zee Entertainment are stocks that could cease to be part of the large-cap universe, says the brokerage. Further, stocks like PNB Housing Finance, Ujjivan Small Finance Bank, and Shriram City Union are likely to move from the mid-cap to small-cap universe.
Actual changes could, however, be different as the m-cap for the entire six-month period ending June 30 will be considered for computation. The new list shall be announced by industry body Amfi within 5 days from the end of the six-month period, with fund managers getting a month to rejig their holdings.

The economic shock triggered by the pandemic and the subsequent lockdown has hit share prices of several firms this year. However, fiscal and monetary measures announced by global central banks have helped the markets recoup more than half their losses.


Industry players said the churn could have been higher for the January-June period, had share prices not rebounded.

Kaustubh Belapurkar, director (research) at Morningstar India, says that though the churn hasn’t had a huge impact on portfolios historically, one nevertheless needs to look at the changes this time.

He, however, said the industry has enough flexibility to navigate through the changes without much turbulence. “Fund managers usually have a sense of stocks that could potentially move in and out of their respective universe. They take corrective action accordingly. Hence, the changes are something that will not be out of the blue,” he said.
Industry players said the Securities and Exchange Board of India provides enough time for fund managers to rejig. Further, there is enough room available to invest outside the stated universe.

For instance, an equity scheme in the large-cap universe has to invest 80 per cent of its corpus in stocks among the large-cap bucket, while the remaining 20 per cent can be in mid-caps or small-caps.

Similarly, mid-cap and small-cap schemes have to invest 65 per cent in the respective bucket, while the rest could even be in large-caps. At present, in the equity MF space, the large-cap category is the biggest with assets of Rs 1.24 trillion. The mid- and small-cap categories had assets of Rs 71,550 crore and Rs 39,000 crore as of end-May.

Market players said that in the event of large-scale redemptions accompanied by high volatility, some schemes could have difficulties in churning their holdings.

However, both in terms of flows and secondary market liquidity, the situation is normal at present, they added.

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