Do this to survive the froth building up in small-cap, mid-cap mutual fund schemes Im talking about basics like careful fund choice, diversification, opting for SIPs, and investing only long-term money in small caps and mid caps. Every smart investor should already be doing this, Sebi or no Sebi, crash or no crash
Dhirendra Kumar
CEO, Value Research
On 27 February, Sebi sent a letter to all AMCs, expressing concern at the ‘froth building up in the small- and mid-cap segments of the market, and the continuing flows in the small- and mid-cap schemes of mutual funds’. The market regulator asked for a policy to be put in place to protect investors. The letter laid down two requirements for this policy. First, ‘appropriate and proactive measures are to be taken by AMCs and fund managers to protect investors, including, but not limited to, moderating inflows, portfolio rebalancing, etc.’ Second, it asked for ‘steps to ensure that investors are protected from the first-mover advantage of redeeming investors’.
The specific threats that Sebi is pointing at and the measures to contain these are quite clear. The regulator is worried that if large inflows in small-cap funds continue, the quality and value of the portfolio holdings will inevitably drop. There is only so much worthwhile investable stock available in the smaller companies.
The second concern is about what will happen if a small- and mid-cap crash does occur. The investors who exit as soon as a downturn begins can disproportionately benefit at the expense of those who remain, as their redemptions are likely to force fund managers to sell better quality holdings at unfavourable prices. This will compromise the fund’s quality and value for remaining investors. This is not a hypothetical situation; we have repeatedly seen it happen in debt funds.
This scenario can create a vicious cycle, worsening the impact of a market crash for investors who are not the first to redeem. Consequently, Sebi’s language points at mitigating this first-mover advantage and aims to ensure a more equitable distribution of risk and loss among all investors. When the letter came out, there was a lot of debate on social media about whether this meant redemptions could be frozen or limited for a certain period in case of a crash. The discussion was justifiable, but also hypothetical and pointless. What happens during a crash will depend on its nature and magnitude.
However, there’s a bigger reason investors should not pay attention to this. If you follow the few basic rules of investing, none of this is going to affect you. I’m talking about basics like careful fund choice, diversification, opting for SIPs, and investing only long-term money in small caps and mid caps. Smart investors should already be doing this, Sebi or no Sebi, crash or no crash.
The real regulatory power over your investments lies in your hands and will help you navigate through market uncertainties with resilience. The wisdom in focusing on basics transcends regulatory concerns and market volatility. By adhering to these fundamentals, investors not only shield themselves from the immediate fallout of market fluctuations, but also position their portfolios to achieve sustained growth over time.
If you want proof, look back at any small-cap fund and its historic SIP returns. Take Nippon India (formerly Reliance) Small Cap, which has been a popular small-cap fund for decades. Over the past 10 years, it has generated SIP returns of 26.3% annually. This means that an SIP of Rs.10,000 a month would have turned Rs.12 lakh into Rs.48.4 lakh. While this fund is the best, many others have done well too. Of the nine small-cap funds with 10-year track records, seven have generated annual returns of over 20%.
While crucial for maintaining market integrity and protecting investor interests, Sebi’s advisory reinforces the value of prudence and foresight in investment decisions. All you need to do is stick to the basics, and you’ll make lots of money.
(The author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
