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Sebi’s disruptive steps spoil MF party

Author: A Saye Sekhar/Friday, July 27, 2018/Categories: Mutual Funds, Expert View

Sebi’s disruptive steps spoil MF party

In its two-and-a-half-decade journey, the mutual fund industry has evolved into one of the robust investment instruments in India. From being just Rs.7 lakh crores in 2013, the MFs have grown to almost Rs.21 lakh crores this year - a figure which is roughly a fifth of India's bank fixed deposits.

With surging inflows of Rs.73,000 crores per annum into Systematic Investment Plans (SIPs), Mutual Fund collections have become a potent counter-force to withstand the ever-changing dynamics of the FII inflows in a way that stabilized the Indian equity markets. Nothing could go wrong in the Great Indian MF party, until a recent move by stock market regulator, Securities and Exchange Board of India (SEBI) that has caused ripples in the investor sentiment.

Categorisation jolts

It's the SEBI's new categorization and restructuring norms which apply to all open-ended schemes (but not to closed-ended schemes) that created a seismic shift in the way fund managers used to invest in and out of the stock-markets. This is the cause of worry among the investors community.

Earlier, fund managers were traversing the whole stock universe, picking large-caps at will and supplementing performance with mid-cap stocks and small-cap stocks to chase alpha (return on investment).

Sebi's new categorization disrupted this flexibility in fund management by thrusting upon all the 41 asset management companies (AMCs) a radical new classification where Equity schemes were classified in all of 10 categories and each category had to be true to the label of market-capitalization mandate. Therefore, large cap fund had to be in the top 100 stocks by market capitalisation and midcap funds only in the next 150 stocks by market cap, whereas small cap funds could be free to pick the entire gamut of stocks below the top 250 stocks by market-cap.

This single measure, first announced in October 2017, gave the AMCs just two months to review all their existing open-ended schemes and forced them to announce restructuring of schemes to conform to the mandate and fit into the categorization. This alone created a silent mayhem, resulting in forced fire-sale of several small and midcap stocks to comply with the new guidelines.

A massive sell-off ensued for the last two months as fund managers had to rejig close to 44 per cent of the total 840 open-ended schemes by the end of April 2018. Selling of midcap stocks happened mostly in large-cap funds, which were investing in mid-cap stocks and small-cap stocks, and growth funds that so far had a multi-cap approach.

Investor-friendly move, says analyst

However, Analyst Anil Rego, CEO of Right Horizons, says: “The SEBI took a wise and investor-friendly decision to recategorize and rationalize the existing open-end mutual fund schemes. The benefit of this overhaul is that it makes Mutual Funds simpler for the investor and also makes funds more comparable.  The negative is that it takes away possibility of innovation in schemes by the fund houses and secondly this results in the impacts during the transition.”

A lot of carnage in the markets coincided with the bad news surrounding Karnataka election results, spurt in crude oil prices, geopolitical tensions and the trade war tantrums between US and China. 

The upending of the markets continued with a different set of measures unveiled by SEBI to tackle the menace of excessive speculation when issues of fraudulent financial reporting hit headlines.

ASMs puts curbs on trading

Corporate governance issues, retail investors’ hiking their stake in companies like Manpasand Beverages and Vakrangee and resignation of auditors triggered Sebi resort to stringent liquidity-tightening measures like Additional Surveillance Measures (ASMs) which put curbs on trading in select stocks (invested by Portfolio Management Schemes etc and a few Mutual Funds).

While these measures applied brakes to the frenzied rise of several micro-cap to mid-cap stocks, it is debatable whether they majorly impacted the markets.

Mr Rego says that over a dozen stocks in the first list of ASM that was put out on May 31, have witnessed a sharp fall. This has created suddenly more supply of shares, leading to investor's portfolio taking a knock and delivery volumes in equity markets fell below 35 per cent in the last two months, a four-year low.

Physical delivery of F&Os wobbles fund indices

Another measure announced is the compulsory physical settlement of Futures & Options that became the proverbial last straw that made the midcap and small cap indices wobble to double digit returns in the negative.

Mr Rego says: “Physical delivery has commenced in 46 scrips in the futures & options (F&O) segment following SEBI’s decision and it is a watershed moment. The SEBI took this decision to align the cash and derivative segments of the market, through the physical settlement for all stock derivatives in a phased and calibrated manner. Currently, if traders exercised their rights, or allowed it to lapse, they have to face STT on the transaction. Fearing this, most traders have squared off their positions.”

If only Sebi hasn’t resorted to such series of delta actions that made the midcap rally come unstuck, investors in Mutual Funds and midcap stocks would have heaved a sigh of relief, especially when Sensex and Nifty are seeing index-managed rallies where only five stocks - Reliance, Hdfc Bank, Bajaj Finance, Kotak Mahindra Bank and IndusInd Bank - have contributed most to the index rally.

 At a time when corporate earnings and monsoon data are turning benign, Sebi could have waited for the markets to stabilize instead of announcing serial disruptions. These indeed resulted in massive wealth erosion as evidenced by the dip in NAVs (net asset values) of several Mutual Fund schemes. For e.g. between 29th January 2018 to 12th July 2018, Nifty returns dropped to (-)3.8% whereas Hdfc Equity Fund and Reliance Multi cap Fund gave returns of (-)11.8% and (-)10.8% respectively. The impact has been quite severe and affects the broad spectrum of the MF universe.

Tips to investors by Anil Rego:

  • investors should not invest in penny stocks.
  • Most retail investors going for direct equity exposure always buy low-cost shares. This is completely wrong.
  • They should invest in a stock when its current value is lower than intrinsic value. One should always analyze their stocks well before purchase or sale.  
  • Remember to buy highly liquid stocks.
  • As a thumb-rule, buy only those shares which have a higher and real intrinsic value.
  • Do not forget to avoid stocks with less than Rs 6-7 crore daily turnover.      

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A Saye Sekhar
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