SEBI Asks Mutual Funds To Moderate Inflows Into Small And Mid Cap Schemes | NDTV Profit
#SEBI directs all the #MutualFund houses to moderate flows in small and mid-cap schemes.
What does this mean for mutual fund investors going ahead?
Watch Samina Nalwala and Muralidhar Swaminathan discussing this and more with #Moneyfront's Mohit Gang and #RoongtaSecurities' Harshvardhan Roongta.
Read: https://bit.ly/49ocMzT
What does this mean for mutual fund investors going ahead?
Watch Samina Nalwala and Muralidhar Swaminathan discussing this and more with #Moneyfront's Mohit Gang and #RoongtaSecurities' Harshvardhan Roongta.
Read: https://bit.ly/49ocMzT
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TVTranscript
00:00 Hello and welcome to the Mutual Fund Show. Remember SEBI has directed mutual fund houses
00:16 to moderate flows in small and mid cap schemes. This directive comes on the back of soaring
00:22 valuation in small and mid cap stocks. This move is aimed at protecting investors from
00:27 first mover advantage of redemption in these funds. Well, it's a big development. We have
00:34 seen some of these schemes actually skyrocket with over 10,000, 10,800 crore rupees entering
00:41 the small cap space in the last few months. Now what does this mean for mutual fund investors
00:47 going ahead? That's what we're going to be discussing. Muli Dharan and Swaminathan also
00:51 joined us. Muli, just before we go over to Harsh Varadhan, a quick one on this, right?
00:56 Funds will always tell investors you must rebalance your portfolio. You've got to do
01:01 it often enough because returns are a function of the markets, risk isn't. And the one thing
01:06 investors need to control is risk. I think the good thing out of this is that the silver
01:10 lining really is that the regulators are now telling you your mid cap funds and small cap
01:15 funds have done exceptionally well. They look expensive, there is froth and I think time
01:20 and again we've talked about this too extensively where large cap looks probably better valued
01:26 or is fairly valued at this stage. So while I know the street has gotten nervous, but
01:31 I think 24 hours in the markets are also looking a little more settled at this stage as we
01:36 see it. Absolutely. So very important points here, Samina. The most important point is
01:41 that the regulator has to step in. This is something the industry must have done on its
01:46 own. Here you have a regulator coming in and telling the viewers, the investors that they
01:52 need to be cautious. Absolutely no doubt about that. But the bigger question Samina is here
01:59 is about what does an investor do who is holding small and mid cap funds. You know that's the
02:04 big question we are going to ask today and we are getting experts who will be able to
02:09 talk to us. Why don't you introduce the guests to the investors.
02:12 We've got Harsh Vandan, Rungta CFP, Rungta Securities and Mohit Gang, Co-Founder and
02:17 CEO of Moneyfront joining in. Harsh Vandan, afternoon. Thanks for joining in. I'm sure
02:21 your phone hasn't stopped ringing since yesterday after the SEBI put out this advisory. What
02:27 are you telling your clients? People are nervous and I think we need to make sense of all this.
02:33 As an investor, should one be concerned at this stage? What have you told your clients
02:37 and what are you going to be telling them? So well, Samina, when you're creating a portfolio,
02:44 it's not about talking about a scenario where inflows have come into small caps and mid
02:49 caps and then we are looking at it. So when you're designing a portfolio, at that point
02:53 in time an investor needs to very carefully do a risk assessment profiling done, which
02:58 basically is aimed at understanding how much are you likely to be able to deal with the
03:06 volatility that comes with mid and small cap funds. So how you design a portfolio becomes
03:11 important. So such directives don't really change that narrative. Now, for example, our
03:16 approach to portfolio creation has always been the core and satellite. So when we say
03:20 there is a core portfolio that you create, where probably 40 to 50% of your allocation
03:26 has to be towards large caps. So that becomes the core portion of your portfolio. The balance
03:31 50% could be in mid and small caps or thematic or sector funds as an individual is comfortable
03:36 with. Now, if you've undergone that exercise and you've designed your portfolio, such directives
03:43 coming in to say that you please look into how your mid and small caps are doing, put
03:48 in some kind of directives or policies in place, which will try and protect the investor
03:54 who's coming in without understanding, then it is primarily for that investor. So as far
03:58 as we are concerned, there is no change in our portfolios because at the time of designing
04:03 the portfolios, we've been very careful in allocating only that much amount of mid and
04:07 small caps as much the investor can take. So we've not looked at or our investors are
04:13 not looking at only past performances and allocating towards mid and small caps. They've
04:17 essentially done risk profiling on themselves and then they are going out and allocating
04:21 towards mid and small caps, which nothing has changed in that context as of today, only
04:25 because of the directives. Right. So balancing the portfolio, taking care of the risk is
04:30 something you always tell advisors, have been telling the industry, has been telling the
04:35 investors. But then, you know, at the same time when there are situations, there are
04:40 investors who have invested in small cap and mid cap. Let me take this question to Mohit.
04:46 Mohit, what would you tell the investors at this stage? If somebody is invested in small
04:50 cap, book profit, move on or simply hold or redeem or add, what would be your advice?
04:58 Thank you so much. I think as Harsh rightly mentioned that the portfolio allocation, once
05:04 done rightly, then you don't have a reason to tweak it or rebalance it or change it or
05:09 alter it just because there has been a directive from the regulator on the markets or because
05:14 the markets have overran or markets have done exceedingly well. Right. I think investors
05:19 have allocated some amount of money in small cap and mid cap baskets only because they
05:24 wanted extra returns and they were happy to take volatility in the first place. Right.
05:29 That was the whole premise of them investing into mid and small caps. Now that situation
05:33 has turned out well for them for last one year. This is a time for them to reap the
05:37 benefits of it and stay invested on the course. Right. If you have decided to invest 20% in
05:43 mid and small caps, please, by all means, continue that path. Don't overdo the allocation.
05:49 I think one small piece of advice which we have been giving to all our clients is that
05:53 if you have or if you have a portfolio of 20 rupees in small caps by virtue of market
05:58 movement, if it has run up to 25 rupees, then yes, by all means, you should take off the
06:03 5 rupees and rebalance it to some other market cap or perhaps move it to some other asset
06:08 class altogether. But if you are well within your portfolio limits, if you are well within
06:12 your asset allocation, then there is absolutely no need to panic. Markets will go through
06:16 bouts of correction. Markets will see these kind of phases. But investors need not panic
06:21 and they should just continue the process of building up their corpuses through systematic
06:25 investments or whatever their process is. I think investors need to stay put with their
06:29 allocations. Mohit, that brings me to my next follow up question. And you alluded to the
06:33 fact that you have got to rebalance your portfolio either on an annual basis or if the exposure
06:40 increases due to a market move. Have you already rebalanced your client portfolios?
06:45 So, we follow a fixed methodology on that. So, every quarter or six months depending
06:51 on what kind of frequency we have mutually agreed with the clients, we follow a fixed
06:56 process and we also have some stepwise formulae. And the formula perhaps is 5% movement in
07:02 the portfolio value or 5% movement in the assets value. And that is when we come to
07:07 a table and discuss whether we need to rebalance or in some cases it could be 10% also. So,
07:12 let us say if the equity and debt allocation is 50-50 and by virtue of market movements,
07:17 the equity has moved on to 60, then we will have a fixed formula that, okay, 60 is somewhere
07:21 where we need to take a follow up step on. And that could then be mutually agreed depending
07:26 on clients' liquidity, clients' preferences, what is risk appetite is, whether it continues
07:31 to remain same, whether it changes with the market scenario or changes with this income
07:35 dynamics. So, keeping all that in consideration, if everything is a status quo, then definitely
07:40 yes at a 5% or 10% movement, we will definitely go ahead and do some amount of rebalancing
07:46 in the portfolio. So, very clearly this is not a situation where
07:50 the investor has to panic, they have to rebalance. If there is excess profit, I will use the
07:56 word excess profit because lot of valuations have run up over the last 3 months and 6 months,
08:02 you know, we can bring up that chart. We will also get specific queries from the viewers.
08:07 Viewers have been sending in queries, I will ask my producers to bring up the queries.
08:11 Harsh, let me come to you on this question. At this stage, should we very clearly move
08:18 to a situation where, you know, I will say that should we move to a balanced fund because
08:23 the interest rate cycle is also turning, forget equities, should we move to balanced hybrid
08:28 fund also? Well, Murali, I will also want to touch upon
08:34 one aspect when you say that we should remove money from small caps and rebalance. Okay,
08:38 so I will just answer that first and come to the balanced hybrid fund category. So,
08:43 you know, most of the investors that you meet, you know, in person and I have met lots of
08:48 them in couple of investor meets. Now, you will realize that most of these investors
08:53 who are small cap investors have come into small caps purely seeing the returns that
08:58 have been generated in the last 1 or 2 years. So, they don't understand small cap as a category.
09:04 If you ask them to name 5 companies in their small cap portfolio, they don't even know
09:08 that. So, very clearly, investors who have come into small caps and mid caps, purely
09:13 looking at past returns without doing a risk profiling on themselves, this is a great time
09:19 to exit, okay, because whatever mistakes you may have possibly made, you are getting an
09:23 opportunity to rectify that at a profit. So, if you, because the small cap and mid cap
09:28 indexes have run up exponentially, it's time that you can cut your mistakes and then redirect
09:34 or rebalance your money into say probably large caps because you are booking your profits
09:38 and going to large caps. So, I think it's a great time to take this directive into consideration
09:43 and look at your portfolio risk profiling and make those changes. Now, coming to the
09:48 question of hybrid funds. So, well, yes, so if you look at one element where we believe
09:53 that interest rates in 2024 should ease out a little bit. Now, when that will happen,
09:58 we don't really have an idea about that, but it looks favorable, you know, the scenario
10:02 looks favorable and suggesting that interest rates will come down in 2024 fall short. If
10:08 not by a great amount, I mean, there will be some correct, some reduction in interest
10:12 rate. So, debt has a potential to generate, make a capital gains on that kind of an interest
10:18 rate reduction that that happens. So, yes, if you park your money into say short term
10:23 funds at this juncture, even if you don't go to the long term, long duration fund, you
10:27 go to short term funds, I think it's a good allocation to make. Keeping in mind the growth
10:32 element of the growth prospects of our country, you cannot get out of equity at this juncture.
10:36 Though the valuations may look rich, though there could be concerns of, you know, when
10:42 you look at relative market comparisons to Asian countries, emerging markets are developed.
10:46 Yes, we are a bit expensive, but it is not wise to stay out of the Indian economy right
10:52 now. So, you cannot stay out of equity. So, yes, there is merit in having a hybrid fund.
10:57 It could be in the form of an aggressive hybrid fund. It could be a balanced advantage fund.
11:01 It could be equity savings, whatever, but you cannot stay out of equity for sure.
11:05 Yeah, okay. Harsh, we have a specific query coming from an investor. He's 28 years. Harsh
11:12 Sheth, his age is 28. His goal is to invest in small cap funds. He has a lump sum investment
11:19 of one lakh rupees and he's dividing it further as 30,000 rupees in large and mid cap funds,
11:26 40,000 rupees in flexi cap and 50,000 rupees each in mid and small cap funds. Is it a good
11:32 time to invest now if the time horizon is five to seven years given the predicted 20
11:37 to 30% correction in mid and small caps? I think he has done his homework. He's expecting
11:42 a 20 to 30% correction. One of you could take this, Mohit or Harsh Vazir. Who do you want
11:51 to go? Look, so my thought has been very clear on these things. Honestly, this is not the
11:57 best time. This is the second best time. The best time was yesterday. He should have done
12:00 it yesterday and not today. He's already late in getting in the market. 20, 30% correction
12:06 is honestly par for the course. If he's going through via an SIP route or a systematic investment
12:12 route, then he would not fear any correction. If the correction at all comes in, he will
12:16 buy more units and he will better deploy his funds. But if the correction doesn't come
12:20 in, he will at least not be regretting one year down the line that he failed to invest
12:25 waiting for inflection, which is what I'm seeing with a number of investors that the
12:29 time they are just time spent in waiting for a correction is far more, doing far more damage
12:35 to their portfolios and their returns than what possibly a correction could have done.
12:39 So my whole hearted submission to all investors out there is don't wait for an opportune
12:43 time. SIP is an instrument which is meant to tackle volatility, which is meant to reduce
12:48 volatility. So you better get into the markets today with whatever allocations you want to
12:52 and keep going on with a systematic discipline process. I think that will fetch far greater
12:56 returns and rewards than just waiting and timing the markets.
13:00 Right Mohit, it's very rarely timing the market. It's usually time in the market that helps
13:06 investors create significant wealth and I think that's what's most important. It's a
13:12 strategic portfolio as opposed to a tactical call that investors need to be taking. Harshwadan,
13:17 I'm going to bring your opinion on this one too and I want you to give me a broader brush
13:21 on what do you think about his query and what is the advice you have from him. And also
13:26 if you can give us a sense of what you make of his holdings. He does a SIP in a Mirai
13:31 Asset Mid Cap Fund, a Quant Small Cap Fund, Quant Mid Cap Fund, UTI Nifty Index Fund and
13:38 HDFC BAF, SPI BAF, Nippon Small Cap Fund, Parag Parik Flexi Cap, Mirai Asset. I think
13:46 to begin with and Harshwadan you'd agree with me, if you own the market you can't outperform
13:50 the market. So firstly I would recommend consolidating that portfolio but I'll leave it to you to
13:55 advise our viewer. Absolutely. So Samina you're absolutely right because the first
14:03 observation that I have in this portfolio is that there are too many schemes in the
14:07 portfolio. So I don't know the amount, the quantum that is investing in each scheme but
14:11 there are about two or three mid caps, there are two small caps. So I think how an investor
14:18 should go about doing things. To begin with, say you have 100 rupees to invest and that
14:23 is your equity allocation, I'm not talking about debt. So if your 100 rupees is supposedly
14:26 an equity allocation, you need to ask yourself how much would you want to invest in each
14:31 market category. So you're going to say that I'm going to invest say 40 rupees in large
14:36 caps, probably another 30-40 rupees in mid caps and a balance in small caps or thematic
14:41 sector whatever. So first you draw up a broad plan saying how much will go into which market
14:46 category. Now within that category, then you start selecting maximum two schemes. I mean
14:53 in ideal situation, one scheme per category is good enough but if you go towards mid and
14:57 small cap, you might want to possibly add fund manager expertise there as well. Because
15:01 I know the stock selection comes into play. If you're in the large cap, probably one scheme
15:05 is good enough. If you're coming to mid and small cap, then maximum as I said you have
15:09 two schemes. So that becomes your approach. Now when you come down to selecting a scheme,
15:16 then you start picking up a scheme saying that if I want to invest into two schemes
15:19 in mid cap, do I want a passive and an active scheme combination or do I want two active
15:24 fund managers to do my job? You go and compare those two schemes that you have shortlisted
15:29 with seeing what is the overlap they have, what are the performances because performance
15:34 is not only judged on a point-to-point basis on last one year. You'll have to see rolling
15:38 returns on different timelines and how fund managers have functioned or what kind of returns
15:44 they've generated in different market cycles. So while there is a bull run, what kind of
15:49 returns have generated and if there has been a market downturn, how well they've been able
15:54 to curtail those downturns. So we want a marathon runner. We don't want a sprinter who does
15:59 extremely well in the first 100 meters and then kind of fails out later on. So you need
16:04 to search for those schemes which have performed steady, who've been functioning in different
16:09 market cycles and have outperformed. So that's the combination. One or two schemes maxing
16:13 each category, I think a portfolio is good to go.
16:16 I'm jumping into the query. This is from Sri Kishore. He's 69 years old and his goal is
16:22 wealth creation. Sri Kishore says he has invested 7 lakh rupees in the quant small cap fund
16:29 direct growth and invested 3 lakhs in the quant active fund direct growth. He asked,
16:35 so should I be invested in these funds or should I invest in other funds for better
16:38 returns in order to create a lump sum corpus for future needs? Harshvardhan, I'll come
16:44 to you first. I'm not sure how long has he invested in these funds for, but let's assume
16:50 it's already LTCG. So let's assume that he's been there for about a year. What do you recommend
16:56 he should do? He's 69 years old, so I'm assuming he's a little more conservative than a 29,
17:01 30 year old investor.
17:02 Well, you know the good part is if you read in the question itself, it says he's 69 years
17:08 old and he's looking for wealth creation. So that's a good part.
17:12 I think Harshvardhan will be more like wealth transition eventually. So I think he's honestly
17:16 watching out for his family.
17:18 That's right. So, you know, the idea is, you know, if he's invested 7 lakh rupees in a
17:24 small cap fund, I'm assuming he's done that research to understand what a small cap fund
17:30 entails, what journey is he going to be taking when you invest in a small cap fund. It's
17:34 going to be highly volatile. Now, if I'm given a personal choice, I wouldn't have designed
17:39 a portfolio like this. You know, I mean, we are more of that kind of a, you know, that
17:44 kind of a stage where we say that you invest not from a trading mindset. So small caps
17:49 would essentially mean a lot of volatility. They've given exponentially good returns in
17:54 the last one or three years, but that does not mean that it's going to continue like
17:58 this in the future as well. And in case there is a correction, small caps will fall in the
18:03 same propensity as much as they've gone up. So my suggestion would be to have a little
18:07 more balanced approach. The 10 lakh that he has, he could most certainly continue with
18:12 the 3 lakh that he has in the quant active fund. However, my concerns are on the 7 lakh
18:16 in the small cap. Given in contention with the SEBI directive, the regulator is showing
18:23 some concerns with the froth that is building in mid and small caps. I think take that,
18:27 take his age into consideration, which is 16 lakh and the allocation of 7 lakhs in small
18:31 caps. I think there is a lot of room to make changes. He could possibly move towards a
18:37 large and mid cap category. So I am reducing the volatility in his portfolio, saying that
18:43 the 7 lakh could go into switch out of small cap, go into a category between large and
18:48 mid caps. So you still have a mid cap in your portfolio, you have quality large caps in
18:52 your portfolio. So I think that approach would be better. He could have two different schemes.
18:56 He could have one pure large cap fund in the form of an index fund, you know, that owning
19:01 the market that we've been trying to talk about that you invest in 50-50 or a Sensex
19:05 30 companies. So you'll have one portion going, that's probably 5 lakhs going into a large
19:09 cap fund and 2 lakhs going into a mid cap fund, which could be actively managed and
19:14 exit out of small cap. That would be my suggestion. Just reiterating, confirming the SEBI directives,
19:20 confirming his age at 69 and allocation of entire 7 lakhs in the small cap. I think this
19:25 is the approach that he takes, as I suggested, between large and mid cap would be a better
19:28 approach to him at this juncture. Sure. So as Samina pointed out, you know, owning the
19:34 market or owning a sector, there are some easier methods and easier, simpler ways. Surely
19:40 one of them is exchange traded funds. You could simply buy exchange traded funds from
19:46 the market, whether it's lump sum, preferably lump sum, because you can buy it at any point
19:50 in the day. Now that will help you buy a basket and market takes care of your investment.
19:55 You know, it's not given to a fund manager. So let me bring Mohit. Mohit, what do you
19:59 think, how can ETFs help investors over a medium to longer period make money? So Murali,
20:07 I think I have been of the firm belief that ETFs or passives is a category, an idea whose
20:13 time has come in the markets, right? And no one can ignore that in any kind of portfolio
20:18 allocation. Look, there are intrinsic benefits to investing in an ETF, whether you invest
20:23 through the ETF route or the exchange route, or you invest through the index route, which
20:27 is through the fund house. I think, give or less, the idea is similar that you are going
20:32 into a passive strategy where there is no active fund manager. And because there is
20:36 no active fund management, the cost is reduced dramatically to invest in these kinds of things.
20:42 And over a period of time, we have seen that as markets evolve, as markets mature, and
20:48 that's an example which we have seen in the Western markets where the US markets have
20:51 you see, 52% is now all invested in passives, right out of the entire market in the US.
20:59 So similarly, as markets evolve and mature in India, you will see it becomes incrementally
21:03 very difficult for active fund managers to year on year beat the market. In lieu, in
21:09 want of that, getting that extra alpha or generating that extra alpha by finding the
21:14 fund manager who will beat the market every year, what investors do is they churn their
21:19 portfolios, they rebalance their portfolios, they move in and out of schemes, which also
21:24 implies a lot of cost on the portfolio. So avoid all this. If you're happy with the averages,
21:29 I think over a very, very long term, which is like a 10 to 15 year kind of a cycle, I
21:34 think getting into an index fund across any category is a worthwhile thing, which investors
21:39 should definitely consider in any allocation, especially for the large cap category. I honestly
21:45 believe index funds or passives is something which every investor should have in the portfolio.
21:50 For mid and small cap categories, yes, you can always argue that there is enough alpha
21:54 available in the market and there are enough good quality fund managers who can beat the
21:58 markets. So you might just want to have a combination of an active plus passive strategy
22:03 or an active plus a factor based passive strategy in those segments.
22:07 Some of the smart beta strategy returns have also been very compelling in the last few
22:12 years. And just to take a piece of what Mohit said, and Murali, I think you'd agree with
22:16 me, what you really need to do is build a core portfolio and a satellite portfolio.
22:20 A core portfolio can be passive, large cap funds because they're cost effective and the
22:25 returns historically have actually beaten passive funds, have beaten active fund managers.
22:31 So there's no point being a 2% cost where you can actually get the same sort of returns
22:35 through a passive strategy in the large cap space. And like Mohit also indicated, your
22:39 satellite portfolio, which is what is doing the alpha generation, could be small and mid
22:44 cap active fund managers and PMSs as well. So I think, Harsh, you want to closing thoughts?
22:50 You've got one and a half, two minutes to very quickly tell our viewers if you agree
22:54 with that strategy.
22:55 Yes. So, Samina, you very well wrapped up the whole conversation that we had, made it
23:00 simple for the investors saying that, OK, you are going to be into a situation where
23:04 you want that, you know, a little extra returns, the alpha, that additional returns that we're
23:10 talking about from the market. And that could be through a passive strategy or a smart beta
23:16 fund. Now, you know, what investors really need to keep in mind, I'm taking this opportunity
23:21 to digress a little bit out of the topic. You know, we've seen investors coming into
23:26 the market, their expectations need to be moderated. I think right now, what worries
23:32 me is that, yes, there is a lot of inflows coming into the market and investors are experiencing
23:37 good returns right now. My concern comes if you come into the equity market looking at
23:42 returns and if at all the markets were to turn around and there's a sharp correction,
23:47 you know, investors are not prepared for that. So you need to be very careful of what the
23:51 market can do. Do not expect and assume that everything go only one way at all times.
23:55 You're right. Replace a little bit of greed with a little bit of fear. That's always a
23:58 good thing. Well, thank you, gentlemen. Great having all of you on the show and was also
24:02 great having you, Murali, join us on the show. With that, we're completely out of time. Thanks
24:06 for watching. There's a lot more programming on the other side. So stay tuned.
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