SEBI\'s new norm & its impact expected on Nifty 50
Nifty has posted a bearish engulfing. This coincides with the big announcement by SEBI to establish minimum investment requirements in each market cap category- large-cap, mid-cap and small-cap. This decision, while disruptive of the natural market forces of demand and supply is a gift for the small-cap investors. You might have noticed several small-cap indices have given a marvellous run-up today, refer to the snapshot below-
This is however not good for Nifty50 as it comprises of the largest 50 stocks in the market.
Now, if you have Rs.10000 (100%), in the following denominations:
Rs. 2500 in a promise coupon from your Mother that she will pay you this money on so-and-so date (debt) (25%)
Rs. 6000 in 6 notes of 1000 denomination notes (large caps) (60%)
Rs. 1000 in 10 notes of Rs. 100 (mid cap) (10%)
Rs. 500 in 100 coins of Rs.5 (5%)
But SEBI is now asking you to hold this same Rs. 10000 in such a way that you have at least 25% each of large-cap, mid-cap and small-cap.
So now, you will have to ensure that you have
1) At least Rs. 2500 in Rs. 5 denominations, that is 5 times of Rs. 500. That\’s a minimum 5x rally in the small caps
2) At least Rs. 2500 in Rs. 100 denominations, up from Rs. 1000, that is a 1.5x rally.
So this means you have 50% already allocated to mid and small caps. Now initially you were holding 60% portfolio in large caps. 60+50=110- not a realistic scenario. So you will have to unload your Large caps to accommodate the mid and small caps.
This, when applied to the stock market, will mean a boo-boo for Nifty 50. The large-cap index is already displaying three undeniable signs of weakness as elaborated in the analysis below.
This move by SEBI will prove to be a big promoter for the Indian economy in general and I believe is very much in line with the Central Government\’s mandate of promoting small businesses as observed in the budget 2020.
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