Widely read:
Anand Kumar
On February 27th, 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' and asking for a policy to be put into place to protect investors. The letter stated two requirements for this policy. One is that '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.' And two, 'Steps to ensure that investors are protected from the first mover advantage of redeeming investors'.
Although the letter does not spell it out, the specific threats that SEBI is pointing to and the measures that can contain those threats are quite clear. The first point shows that the regulator is worried that if large inflows keep coming into small-cap funds, then 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 point is targeted at what happens if a small and mid-cap crash occurs in the markets. Investors who decide to 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 to remaining investors. This is not a hypothetical situation - we have repeatedly seen it happen in debt funds.
This scenario can actually create a vicious cycle, worsening the impact of a market crash on investors who are not the first to redeem. Consequently, SEBI's language points to mitigating this first-mover advantage and aims to ensure a more equitable distribution of risk and loss among all investors. When this letter came out, there was a lot of sharp discussion on social media about whether this meant that redemptions could be frozen or limited for a certain period in case of a market crash. The discussion was justifiable, I guess, but also hypothetical and pointless. What happens in a crash will depend on its nature and magnitude.
However, there's another, bigger reason investors should not pay attention to this. If you just follow the few basic rules of investing, none of this is going to affect you. I'm talking, of course, of simple things like careful fund choice, diversification, SIPs, and investing only long-term money in small and mid-caps. Every smart investor should already be doing this: SEBI or no SEBI, crash or no crash.
The real regulatory power on your investments lies in your hands and will help you navigate through market uncertainties with resilience. The wisdom in always focusing on the basics transcends regulatory concerns and market volatility. By adhering to these basics, investors not only shield themselves from the immediate fallout of market fluctuations but also position their portfolios for sustained growth over time. This disciplined approach underpins successful investing, irrespective of market conditions or regulatory interventions.
If you want proof, you can look back at any small-cap fund and see actual historic SIP returns on Value Research Online. Take Nippon India (formerly Reliance) Small Cap, which has been a very popular small-cap fund for decades. Over the last 10 years, it has generated SIP returns of 26.3 per cent per year through all the ups and downs of the markets. That means 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 very well. Of the nine small-cap funds that have a 10-year track record, as many as seven have generated returns of more than 20 per cent per year.
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 regardless of any hiccups here or there.
Also read: Investors' real job
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