Mutual Funds: How recategorisation of MF schemes impacts mid and small-cap funds

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Published: July 24, 2018 12:09:10 AM

In the current year, investors are noticing a strange thing in the financial services space. While the 30-share Sensex is hitting a new high , the portfolio of most investors is not reflecting the same growth.

As per AMFI data, SIPs in January 2018 was Rs 6,425 crore which increased to Rs 7,554 crore in June, a growth of over 17%. (Reuters)

In the current year, investors are noticing a strange thing in the financial services space. While the 30-share Sensex is hitting a new high , the portfolio of most investors is not reflecting the same growth. On hindsight, one can attribute certain reasons for this divergence. Over the last many months, it is the domestic investors who have been increasingly investing in mutual funds contributing to the rise in Sensex and Nifty.

In the last six months, Systematic Investment Plans (SIP) have witnessed a steady growth. As per AMFI data, SIPs in January 2018 was Rs 6,425 crore which increased to Rs 7,554 crore in June, a growth of over 17%.

Fall of mid and small-cap stocks
But for most investors, their portfolio has reported a de-growth. Over the last many months till January this year, the mid cap and small cap indicies witnessed a sharp uptrend in share price driven by earnings growth in a few cases and cyclical nature of the industry in other cases. In the Union Budget of this year, a provision to tax long term capital gains (LTCG) in equity was introduced. It seemed like a miniscule element in the whole scheme of things, to increase the revenue of the government. But then, the markets reacted negatively. And a whole list of stocks, especially in the mid and small-cap category have reacted negatively to it.

As human beings, we are wired for action. As changes happen in the ecosystem, should one pause, take a step back and then act ? It is easier said than done. And on hindsight, one can always be right. But then actions are taken at that time with the data available at the prevailing time.
Many a time, regulatory changes causes price movements and volatility in the short term. Will it act in the similar manner over a longer time frame, only time will tell.

Measures from Sebi
Besides the LTCG, Sebi this year has brought in two more significant regulatory changes—Additional Surveillance Measures (ASM) and Recategorisation of Schemes in Mutual Funds. Both the measures are supposed to be investor friendly, but the price movements in the stocks are not reflecting the same.

In fact, ASM is supposed to be beneficial for investors as Sebi would keep tabs on price volatility and variation, setting stocks circuit filter to 5% and a margin of 100% in ASM identified stocks.

The recategorisation of schemes in mutual funds is to ensure that the investors identify schemes suited to their specific needs and risk profile and to narrow down the confusing multiple options under each category. So, each fund house cannot have a more than one scheme in a category. Moreover, the scheme name also has to confirm to the Sebi guidelines.

This has ensured that quite a few schemes have changed the portfolio structure (exited the mid- and small-cap holdings and increased the large-cap holdings) to comply with this regulation, which has ensured that the stocks which did not comply with the norm had to be sold. As a result, there has been a steady fall in the mid- and small cap stocks.

No one could have had an inkling of the wealth destruction in the mid and small-cap sector as a result of this regulatory change. As, an investor, we can only control what is in our hands—our behaviour, risk appetite, asset class allocation and time horizon—the framework which we always need to have.

Kneejerk reaction will lead to wealth destruction. It is time to revisit the mutual fund portfolio and check the constituents and act proactively. In the investing journey, there are times when one needs to load up on investments, and times when one needs to be sit on cash and wait like a hawk for the opportunity.

(The writer is managing partner, BellWether Advisors LLP)

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