The Pension Fund Regulatory and Development Authority (PFRDA) has revised its investment rules for pension funds, allowing them to invest in the top 250 stocks by market capitalization listed on Indian stock markets. This change is expected to benefit midcap stocks more than smallcaps.
Previously, private pension funds could only invest in a list of 200 approved stocks. The new rules also permit investments in gold and silver ETFs, which have seen a strong surge this year. The changes aim to increase the popularity of pension funds by offering a wider range of investment options to customers.
Analysts believe that midcap stocks will benefit the most from this rule change. Naren Agarwal, CEO of Wealth1, said that the new rules will bring a new class of long-horizon, rules-based buyers into the midcap segment, improving liquidity and price discovery. Abhinav Tiwari, Research Analyst at Bonanza, noted that midcaps will attract more institutional money due to their better liquidity, reliable disclosures, and lower volatility.
These companies, ranked between 201 and 250 in terms of market capitalization, are expected to see steady, long-term institutional inflows that can improve liquidity, reduce volatility, and support valuation re-rating.
Analysts agree that smallcaps will not benefit as much from the rule change, as they still fall outside the investable universe. However, Abhinav Tiwari noted that smallcaps may see some indirect positives from the change.
The flow of funds into midcaps is expected to be gradual, with pension funds' equity caps and glide-paths limiting one-off surges. Fresh demand will still discriminate on earnings quality, cash conversion, and disclosure standards.
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