SENSEX goes Partying, Mid & Small Caps left behind

January 2018 has brought a lot of good news like the IMF reports suggesting good GDP growth numbers, PM giving the keynote at Davos, world looking at India as their investment destination and along with that some very interesting movements in the market. Broad indices like SENSEX & NIFTY going higher and higher while the mid & small caps are going down.

Due to SEBI’s decision to re-organize Mutual Fund portfolios, to have one scheme per category and Large Cap schemes should have a prescribed percentage of large cap stocks in their portfolio. Until now, funds used to have good amount of mid and small cap exposure which helped them achieve better returns against the benchmarks. Now, that has got changed and hence, the shuffle of selling mid and small caps to add large cap stocks to the portfolios.

First instance of the regulator’s over interference on the financial assets has begun to show up. Mutual Funds are now forced to buy more of something that is not good in quality, the reason why they shunned them. Because of buy orders in huge quantities that have created artificial demand, prices are going up and with them the broad indices too are reaching for higher highs. Once the buying is over, markets will begin to react.

The huge flow of retail money, which has come into the markets after seeing big growth and with belief that the economic activity is really strong to continue the growth momentum, is going to get a big surprise. All the belief’s and the environment are perfect without any change. The only concern now is the regulator who in the thought of bringing more transparency is creating more challenges to the market participants.

This over indulgence will create underperformance and deplete the quality as well as the belief of the retail investors, who have put in a lot of investments into the mutual funds expecting returns that were made in the last year. When the retail investors experience poor performance, they will begin to withdraw their investments which will create pressure on the fund managers to liquidate, to meet redemption pressures. Which will again force them to sell mid and small cap stocks which have been the performers and further bring down the overall performance of the schemes.

In India, many a times, it is the regulations that are causing bigger challenges and bring down businesses. Later, the blame goes to the operators.