Sebi, in a circular, on Friday announced new set of portfolio allocation rules for multi cap mutual funds where the Market Regulator made it mandatory for the multi cap funds to invest a minimum of 25% of their portfolio each in large cap stocks, mid caps and small cap companies. To comply with the new rules, fund managers will have to bring down their large cap holdings and increase mid cap and small cap holdings in their multi cap schemes by January next year. Analysts expect a rally in mid cap and small cap stocks around this event.

"We will see a rally in mid cap and small cap space in around one year due to accelerated buying by the mutual fund houses to comply with the new portfolio allocation rules," said Sunil Subramaniam, Managing Director, Sundaram Asset Management in a YouTube video uploaded by the AMC.

So, which companies will these fund houses buy? Any guesses?

Well, Abhimanyu Sofat, Head of Research at IIFL Securities believes that mutual fund houses will mostly buy the stocks with which they are comfortable. He said, “ The multi cap funds may increase the allocation mostly towards their existing mid and small cap holdings going further to comply with the portfolio allocation rules."

Sofat was speaking in a video uploaded on YouTube by IIFL Securities.

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Sofat gave out names of a few mid cap stocks which might see more buying by the mutual fund houses in around January next year. “Among mid cap stocks, AU Small Finance Bank, Jubilant FoodWorks, SRF ltd, Bharat Electronics, Ramco Cements, Balkrishna Industries, Power Finance Corporation, TVS Motors, Voltas, Crompton Greaves Consumer Electricls, and REC are some of the top existing holdings by the fund houses which may see further buying by the AMCs," Sofat said. As a result of enhanced buying in these stocks, a big rally in these mid caps stocks can be seen.

Among small caps, Sofat believes there could be an upside in the stocks within market cap between 3,000 crore and 7,000 crore.