Good news and bad news

There's good news, and there's bad news. Which one do you want first? I'll go with the good news. Equity markets are booming, and the returns of equity mutual funds are galloping. And the bad news? Small-cap stocks, which have driven the gains far more strongly than large caps, are widely perceived to be in a shaky territory. As things stand, the small-cap indices are sort of tiring and more importantly, even SEBI has been driven to issue an unprecedented public warning about this.

On February 27, 2024, the regulator issued a communication to all fund companies highlighting concerns about the increasing speculation in the small- and mid-cap segments and the ongoing inflows into mutual funds' small- and mid-cap schemes.

SEBI asked them to implement a strategy to protect investors. The communication outlined two main directives for this policy: First, the implementation of preventative and appropriate actions by AMCs and fund managers, including strategies like inflow moderation and portfolio adjustment, among others, to protect investors. Second, it emphasised measures to guard against the advantage that early redeeming investors might have, ensuring a fair environment for all investors.

These warnings from SEBI are unprecedented and have investors and the fund industry in a tizzy. To put it in plain language, they mean that small-cap funds should: 1) stop taking money, 2) if they do, then stop investing it in small caps and 3) if the market crashes, they should put limits on redemptions.

By the standards of equity fund regulation in India, that sounds quite drastic. However, the real question for us is what this means for investors regarding what they should do. Given the gravity of SEBI's warnings, investors are now at a crossroads, faced with critical decisions about their investments in small-cap funds.

For those holding positions in these funds, the conventional immediate advice might lean towards caution and diversification. Investors should consider balancing their portfolios, perhaps by shifting some focus towards more stable, large-cap stocks or other asset classes less prone to the volatility observed in the small-cap sector. In the light of SEBI's missive, fund managers are also likely to recalibrate their strategies, which could include identifying alternative investment opportunities that align with the regulatory framework and protect investor interests.

However, moving beyond the obvious things, the real question is whether any sensible investor finds themselves in serious trouble. Those who adhere to a few fundamental investing principles can ignore all this drama. I'm talking of the basics - essential strategies such as careful fund selection, diversification, not allocating too much to any particular market segment, SIPs (of course) and most importantly, allocating only long-term capital to small- and mid-cap investments. These should always be done regardless of SEBI's warnings of potential market downturns or other external events. Those who have done this have no cause for worry.

That raises the question of how an investor should do all this. It's all very well for me to say that you should maintain your small-cap exposure within a certain limit, but how do you keep a tab on that? When small caps zoom much faster than other segments of the market, their weight in your portfolio keeps increasing.

Not just that, you need to be aware of the actual sectoral exposures that funds are taking. Remember, small-cap funds can take up to 40 per cent of large-cap stocks. So, some small-cap funds are like what flexi caps used to be, while others are not. How are you expected to keep track of all that? Many investors seem to make decisions based on intuition rather than hard facts, overlooking the crucial adage, 'If you can't measure it, you can't manage it.' This approach is ill-suited for investing, especially for the average individual aiming to save. In the realm of investments, adherence to numerical analysis is critical: effective management requires precise measurement.

Navigating and monitoring your financial goals becomes difficult without a solid quantitative understanding of your investments. What's more troubling is the risk of being unaware of the feasibility of these goals or lacking a concrete strategy to attain them. Admittedly, navigating this process can be complex and demanding.

Well, that's where Value Research comes in. Or, more precisely, our Value Research Premium service. Pardon me for the hyperbole, but it's simply the best way to stay on top of your investments, know what is happening, and be assured that you are on track to meet your financial goals. When I say best, I mean the best in the world. Value Research Premium provides a collection of handy tools, arguably the best resources available to any Indian mutual fund investor. Let's briefly discuss some of the benefits you can expect:

Portfolio Planner: These are custom portfolios offered to you as part of your premium membership. The algorithm we have evolved considers your goals, income, saving capacity and a number of other factors.

Portfolio Analysis: Only a few members start their investment from scratch. For most, a big question is whether your existing investments match your goals. This is often tricky to answer because switching old investments has many implications, not the least of which is taxation. In the Premium system, you can get an evaluation and a suggested fix list based on our expert teams' input.

Analysts' Choice: Often, investors want to choose their funds for some particular investment purpose. There are over 1,600 available to you, and even with the help of our rating system, it's a lot of work to zoom in to the right set. However, that won't be a problem for you because, as a Premium member, you will have access to Analysts' Choice. Instead of the 40 official types of funds, we have created eight investor-oriented categories that match precisely with your financial goals.

Our analysts have carefully selected a handful of funds in each category to serve you with the best outcomes.

Of course, there's a lot more to Premium. So, head over to Value Research Premium (vro.in/premium), read more details of these features, see glimpses of what Premium has to offer, and read the testimonials of our members.