00:00 Let's just get in Ashish Somaiya, CEO,
00:01 Vito Capital Management.
00:03 He joins us right now on the show.
00:05 It's the first time that we're talking to Ashish.
00:07 Ashish, thank you so much for taking the time out
00:09 and being with us.
00:11 Bring us in on your thoughts around this SEBI caution,
00:16 talking about the small cap space, using the term fraud.
00:21 What kind of an impact can something like this have?
00:26 I think that, Neeraj, it has been in discussion
00:29 for quite some time.
00:31 You obviously are aware that as long back as early 2023,
00:37 you saw that a lot of small cap funds, quite a few actually,
00:41 at least four or five of them, which I can recall, including
00:44 us, all of us have been running our mid-cap schemes
00:48 and some of the small cap schemes
00:50 purely for systematic flow, which
00:52 means we've been allowing only SIPs and systematic transfers
00:56 and generally avoiding large money or hot money coming
01:00 into the scheme.
01:02 Because typically, however much we
01:04 may talk about investor behavior and investor education,
01:08 the reality, unfortunately, is that money changes returns.
01:13 And you know that in the last one year.
01:15 And as a result of the amazing last one year, one year,
01:18 three year, five year, 10 year, 15 year,
01:20 whatever time frame you look, small cap and mid-cap
01:24 seems to be the best performing part of the market by a mile.
01:29 And generally, when such great performance comes in,
01:31 money tends to change.
01:34 But then it also increases the risk.
01:36 Because all said and done, if you take mid-cap,
01:38 65% of the portfolio has to be within 150 stocks.
01:41 If you take small cap, 65% of the portfolio
01:44 has to be within some 250 stocks.
01:46 And as you'd appreciate, everybody
01:47 doesn't want to buy all the 150 or all the 250.
01:51 Generally, maybe half of them are worth buying or something
01:53 like that.
01:54 So as a lot of money comes in, people
01:56 tend to hold bigger and bigger positions.
01:58 There could be impact cost.
01:59 Sometimes the lack of liquidity might drive up prices.
02:02 And it's like a double-edged sword.
02:04 So I think the regulator is just kind of cautioning and telling
02:06 everybody to prepare for eventuality.
02:09 Yeah.
02:10 Good morning.
02:10 Ashish Burli here.
02:12 I have a question.
02:13 See, it's always a problem when there is a nonstop bull run.
02:20 We have seen the kind of inflows into small and mid-cap stocks.
02:23 One of the key issues that SEBI has raised here is to--
02:28 it's not so much about moderating the inflows.
02:31 Every fund can moderate the inflows.
02:32 They can control SIPs, put a limit.
02:34 That's an easier job to do.
02:36 But the bigger worry is redemption.
02:38 So SEBI has cautioned that there might
02:41 be early movers who would get the advantage of redemption.
02:45 And the late redeemers will lose money.
02:48 How will the industry control this?
02:51 So Murli, I just want to tell you that--
02:54 not because I want to back up the industry,
02:56 but I've been around 25 years.
02:57 And I think it's probably the first time
02:59 where the industry itself has been proactively acting.
03:03 Because let me just tell you that when you're
03:05 talking about redemption, that's like saying that, OK,
03:08 when the redemption comes, I need to be prepared.
03:10 But getting inflows and ensuring that you get very, very
03:14 granular inflows for as long as the last one year plus,
03:18 I think that prepares you very well for eventuality.
03:21 Because if you see a lot of big funds over the last one year,
03:24 at least, long-term investors would
03:26 have been there for time.
03:27 But over the last one year, one and a half year, a lot of us
03:30 would have got only granular money, right?
03:32 I mean, 5,000, 10,000 per person per month kind of flow
03:35 we would have got, right?
03:38 So I think that getting the flows
03:40 and accepting only granular money, that
03:43 was also part of preparing the eventuality that ultimately
03:45 someday the bull run won't sustain
03:48 and there could be outflows or there could be eventuality.
03:50 But coming to your point about redemption,
03:53 I think, look, every fund manager, every investment
03:55 committee--
03:56 and I can tell you firsthand, we track the liquidity of stocks.
03:59 We track every now and then when we have the investment review
04:04 committee, we track how many days it
04:06 will take us to liquidate 5% of the portfolio,
04:09 10% of the portfolio, how many days
04:11 it will take us to sell a stock completely.
04:13 All of those things are tracked.
04:15 Right, right.
04:16 OK, we are also joined by Dheerendra.
04:18 Dheerendra is an expert who has tracked mutual funds
04:22 for more than 30 years.
04:24 Dheerendra, welcome to the show.
04:25 Thanks for joining.
04:26 Thank you, Murali.
04:28 Dheerendra, what's your thought?
04:29 It's perhaps for the first time that SEBI has kind of stepped
04:32 into very clearly say that, look,
04:34 you have to put an end to this overvaluation.
04:38 People keep putting more and more money
04:40 into a smaller basket of funds.
04:43 What are your initial thoughts on this?
04:46 My thought is that this is really for the first time,
04:49 and that is not SEBI's job.
04:50 It should not be doing it.
04:51 But I think it is doing out of concern.
04:54 The reality of the market is a little different.
04:56 When you look at what happened in case of Frank and Templeton,
05:00 then SEBI took some steps, and now we
05:02 have a fallback fund of a very large scale.
05:05 Just having that itself will ensure that we will not
05:08 have that problem.
05:09 That was the SEBI's contribution to a systemic gap
05:13 that we have that we don't have a very highly liquid market
05:16 for.
05:16 Likewise for the small caps.
05:18 Small cap, look at the dynamics.
05:19 They are getting massive flows.
05:21 Investors are putting money.
05:24 A reasonable part of it will be coming by way of SIP,
05:27 gradual money, and long-term money, which is very desirable.
05:31 And for the first time, it is happening so steadily
05:33 over the past couple of years that otherwise mutual funding
05:37 flows always used to be a very seasonal thing,
05:40 whether it be 1992, 2001, 2005, 2007.
05:45 This time around, it is broad-based.
05:48 And look at what is the underlying.
05:50 Small cap stocks, the good ones where the promoters are
05:53 running their business passionately
05:55 and fund managers like them, and they
05:59 take all the things that they have,
06:01 all the variables which a good stock will have
06:04 or a company will have.
06:05 They are the companies where the foreign investors
06:10 don't put money.
06:11 The NPS money does not flow in.
06:13 The EPFO money does not flow in.
06:15 This is a market which is made up entirely
06:17 of speculators on one hand and mutual fund investors
06:21 on the other hand.
06:22 The speculators will run away because pigs are
06:25 created to be slaughtered.
06:27 And that is what SEPI study also say,
06:31 that nearly 5%, 7% people make money.
06:36 The rest of them actually are unable--
06:38 so that is another segment where individual investors
06:42 participate.
06:43 But the fallout of that is that there is a dearth--
06:47 the market falls.
06:48 Some investors, mutual fund investors may also panic.
06:51 And whenever there is a fall and there
06:53 is no other side of the market, then the fall is very severe.
06:57 And that has a significant impact.
06:59 We should not forget that in a narrow market of 2008,
07:02 small caps, some of the small cap funds went down by 70%, 75%.
07:07 And that is the fear.
07:08 I don't see that kind of situation here
07:11 because most investors psychologically
07:13 are extremely uncomfortable with a fall only when they see
07:17 that the capital going down.
07:19 Right now, most investors will be sitting on massive gains.
07:23 And investors' attitude to a decline
07:26 is very different when he's losing his gains as compared
07:29 to losing his capital.
07:31 Right.
07:32 It's interesting because up until now, we
07:34 were calling all this money sticky money.
07:35 Now suddenly, we're concerned if there is an outflow of this.
07:38 But Ashish, hi.
07:40 It's Aminah.
07:40 And we haven't spoken for a while.
07:41 But I have two very simple questions.
07:45 In the last couple of years, liquidity
07:47 was a concern that Sebi talked about.
07:50 But in the last few years, we've seen micro companies
07:52 become small, small companies become mid,
07:54 and mid almost become large, which
07:56 means the liquidity situation in some ways
07:59 has actually improved.
08:01 Do you feel like there will be any actionables on this?
08:03 Of course, this is the diktat.
08:04 This is a talking point.
08:06 And we understand that.
08:07 But what happens in terms of actions going ahead?
08:10 And B, if there is a little bit of rebalancing
08:13 that takes place because SIP money is sticky money,
08:16 do you think the large cap space, which
08:18 has been waiting for a catch up--
08:20 and we've been depending on FI flows for that--
08:22 might actually start doing well on back of just simple DI
08:26 reallocation to the large cap space?
08:28 So it's actually a win maybe for the large cap space
08:31 that imagine while the warning for the broader markets.
08:35 So yes, Amina, two parts to your question.
08:38 I think the first one, which you mentioned,
08:39 that micro caps became small caps,
08:41 small caps became mid caps.
08:42 To the extent that there is obviously a natural--
08:45 there's always an underlying natural force
08:49 that to the extent that the market
08:51 caps are rising because underlying earnings are rising
08:54 or the amount of investment is rising, to that extent,
08:57 it's fair.
08:57 But if there is a general perception
09:00 that a lot of this is happening only because of PE expansion,
09:04 that's where I think risk assessment
09:06 and the regulatory warning might be probably coming through.
09:09 And it's true.
09:10 Just bear me for a moment.
09:11 Look at the statistics.
09:13 In 2023, the small cap component of the market--
09:17 you look at BSE 500 as the whole market practically,
09:20 small cap component was up by about 46%.
09:23 But within small cap component of BSE 500, that 46%,
09:26 it went up in 2023.
09:28 You break it into PSU and non-PSU.
09:31 PSU component of small cap went up 120%,
09:34 whereas the non-PSU component of small cap
09:37 underperformed the broader small cap itself.
09:39 What does that tell you?
09:40 It tells you that whenever something becomes a theme,
09:43 whenever something becomes a story, whenever something
09:46 becomes a go-to, it's prone for risk.
09:49 So I think the risk assessment is not entirely wrong.
09:52 And I think that everybody needs to prepare.
09:55 Now, on your second question, there
09:58 is a limit to how much one can really reallocate.
10:00 Because if you were to say that, OK,
10:02 entire small cap industry, say, 1 and 1/2 to 2 lakh crores,
10:05 for example, just off the top of my head, maybe 2 lakh crores,
10:09 you know that 65% has to be in what is defined as small cap.
10:14 And everybody cannot move all the money into large cap.
10:18 So incremental money, I think investors
10:20 would do well to follow what you said.
10:22 I think it's likely to happen that people
10:24 might go to balance advantage funds or large cap funds
10:26 or large and mid-cap funds.
10:28 Incremental flows, yes.
10:30 But existing, maybe some managers
10:33 will rebalance their portfolios as the circular says.
10:36 I don't know how much you can really
10:38 put into large cap in all of these small cap funds.
10:41 Right.
10:42 Absolutely interesting observation.
10:44 Dhirendra, I'll come to you for a quick, short answer,
10:46 the last question just before the market's open.
10:49 How do you think we can stem the tide now,
10:53 especially when it comes to redemption,
10:54 to be fair to all the investors?
10:56 What are your thoughts on that?
10:58 No, nothing can be done because you can't really
11:01 fiddle with the NAV.
11:03 NAV is to be calculated the way it is.
11:05 And I don't think the fear may not be--
11:08 it might be a very temporary fear, if at all there is one,
11:11 because mutual funds also get some short-term money.
11:15 And nothing which prohibits short-term money coming
11:18 into small cap funds as well.
11:20 But the kind of money that has flown into small cap funds
11:23 over the last couple of years, and look at the returns,
11:25 the long-term returns are so compelling,
11:28 that I have found it really the other way.
11:32 On every decline in the recent past,
11:35 mutual fund investors have put more money.
11:38 Thank you, Dhirendra.
11:39 Thank you, Ashish, for joining us and taking us
11:41 through the kind of situation that we
11:45 are in as far as small cap and mid-cap investments
11:47 are nearage, Samina, over to you for the market's open.
11:50 Yeah, thank you.
11:51 Pre-open rates have settled.
11:52 This is an interesting conversation, by the way.
11:54 And I know, I think both our guests mentioned
11:56 that there are some things which not too much can
11:59 be done about as well, and a lot of moving parts here.
12:02 Let's wait and watch.
12:02 Words of caution, watch out if you're
12:04 investing in the small cap space.
12:05 Not all is bad, by the way.
12:07 The pre-open rates have settled.
12:09 And when I look at stocks which are moving around,
12:12 on the gaining side, you have Sriram Finance right up there.
12:17 [MUSIC PLAYING]
12:21 (dramatic music)
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