The regulator with this move has told the mutual fund industry to be true to its character, says the market veteran.
Am I correct in saying that this, in a sense, is early Diwali at a time like this when we’re all scrambling for good news for a mid-cap stock picker like you?
I don’t think this is just limited to the next two months. This is more of a structural move like Amfi’s classification of large-cap, mid-cap, and small-cap stocks. The rules were very clear for large caps and small caps. And now, very opportunely, Sebi has defined that multi-capitalization funds must really reflect that characteristic. Right after this news, I saw that many multi-cap funds had invested as much as 90-95% in large-cap companies, as defined by the regulator. It’s a fantastic move. It would not have come at a more suitable time when India as a whole is struggling and if implemented and if the multi-cap category remains where it is, this will lead to a significant revaluation of small and medium-sized companies. insurance companies.
Could you argue that this is just a liquidity move and a short-term reinforcement injection? Small and midsize company stock prices may go up, but what about business fundamentals? Why do you think this will change the fundamentals?
Who can say that there is no value or that there are no gems in small and medium-sized businesses? There are many companies that have a great deal of value and I have been investing money in midsize companies so I can tell you with confidence that there is a lot of value in that space. And such a move will help to recognize the value of these companies. Let’s not forget that India is a very entrepreneurial country. When entrepreneurs who run unlisted companies find that they can get real value for their assets in a listing format, many beautiful companies will go public because there will be valuation. What has happened in the last two years is that the markets have become so polarized that there are only 25-40 companies in which 90% or 80% of mutual fund assets are parked. This move will help unlock value in many small businesses. and medium-sized companies. This will help to expand the entire market and will help many companies that are in the unlisted domain, many new companies that could not be listed because there will be valuation in the stock market.
We saw a very large mid-cap bull market between 2013-2014 and 2018 before they peaked. If a bull market does indeed have to start with small- and mid-cap stocks, how will it differ from the last bull market?
It would be because mutual funds are going to invest this money. We believe that mutual fund managers are experienced, so the money will be in their hands. It will not be the case that just because you are a small-cap company or a mid-size company, you qualify to be in the portfolio of a mutual fund scheme. What will happen even within the small-cap space and the mid-cap space is that companies that have a very solid business model, a very high standard of corporate governance are the ones that will qualify for investment from the mutual fund industry. So this will be different than what happened in the past.
Do you think this will also fix many of the underperforming challenges that the mutual fund industry has been facing in large part due to concentration on a few mega stocks like Reliance or HDFC Bank?
There will be differentiation within portfolios and within performance for individuals who have the ability to identify good companies in the small and medium segment. This is because until now, if you were buying a small-cap or mid-cap company, there weren’t many buyers the size of that small-cap / mid-cap basket.
If the mutual fund industry as a whole is about 10 crore lakh, I’m just giving that number, the small cap basket was only 40 billion rupees and maybe mid-size companies had another 40-50 billion rupees. So only 10% of the total money was invested in small and medium funds.
All the companies that were there in this space were not receiving buyers. This move will ensure that there will be Rs 25,000 crore of additional purchases in a small cap space. Sebi has given approximately six months to align the portfolio. So in that time period, many companies that have hidden value will truly be recognized. And people who only want to invest in large-cap companies will shift part of their allocation from multi-cap funds to large-cap funds. And people who just want to be in a small-cap space can shift some of the allocation from multi-cap companies to small-cap companies.
Now what happens to large-cap stocks? Can they enter a correction based on time and price?
Yes, to some extent there will be a correction because it is not about new money that is coming in. So if there is a purchase of Rs 25000 crore that would occur in small cap companies, there will be corresponding sales from the large ones because this is not new money coming to market. This is the money that will circulate. Now, it remains to be seen how much money will actually be left in multi-cap funds, but I am sure they will be sold in large-cap names and to that extent bought in small- and mid-cap names. This is a brilliant move from the regulator to a broad market base like India where there are 2,000 publicly traded companies and we can’t have a polarized market of just 10, 15 or 20 stocks.
Given the number of demat accounts that have been opened, the appetite for small and mid-cap stocks is there and not just from the mutual fund industry. If the mid- and small-cap space is re-qualified, many individual investors may start down the path of small- and mid-cap stocks now. What is your view?
This is not a two or three month move. This is more of a structural imbalance that exists in the market, with many of the large-cap companies trading at a phenomenal valuation. I am not saying that they are not doing a good job or that they are not good companies, but the difference between the valuation of small and medium-sized companies compared to large ones has become very wide and this type of change will to some extent help to bridge the gap .
Suppose you buy a small cement company that is trading at $ 40 and some mutual fund investor decides to buy it at a valuation of $ 40, and that company goes from $ 40 to $ 80. Then it will still be cheaper than $ 200 at which The large company is listed, but all other companies listed at $ 30- $ 40 will be downgraded. Now not all of them will be bought by mutual fund schemes, but there will no longer be that kind of difference between one small cap and another. The overall market will be re-classified into the small and medium segment.
Don’t you think that in a bad market or when a market correction occurs, some of these stocks can suffer equally?
They will suffer, and to that extent, investors will have a choice. When the market corrected in 2008, even the largest companies corrected. We have seen that phase when this crown issue came along in March. When the market corrects, everything will be corrected and the impact on small and medium-sized companies will be to that extent greater but that is for investors to decide if they want to take that risk or not, if they want to invest in multicap funds that have this risk. Or conversely, if you were in 2018, a kind of situation where there was a bull run that was targeting small and medium-sized companies and if you were in a multicap fund, which invested 95% of your money in large caps, then they have also missed the rally. The regulator with this move has told the mutual fund industry to be true to character. If you’re saying multicap, at least let it reflect. Now, it is up to the investor to choose whether he wants to take the risk of investing in small and medium-sized companies. If you don’t want to take the risk, you can always switch to large-cap funds.
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