The Securities and Exchange Board of India (SEBI) recently raised concerns about the accumulation of froth in the mid-cap and small-cap segments, causing significant pressure on them. An index comprising small-cap stocks witnessed a decline in market value exceeding $80 billion in less than two weeks subsequent to regulatory authorities highlighting the risks of overheating and advising funds to restrict their purchases.
The sell-off intensified recently with indices tracking small-cap and mid-cap stocks experiencing a plummet of more than 4% each. On March 19, the Nifty Small Cap index dropped by over 2.5%, hitting 14,762, while the Nifty Mid Cap index rose by over 0.66% to reach 46,501. Since February 19, 80% of BSE SmallCap stocks saw negative returns.
In a hypothetical scenario where mid-cap and small-cap stocks experience a downturn, investors who exit as soon as the decline begins can disproportionately benefit at the expense of those who remain, as their redemptions are likely to force fund managers to sell better quality holdings at unfavorable prices. This action will compromise the fund’s quality and value for remaining investors.
So, to prevent this from happening, SEBI (the Securities and Exchange Board of India) has some some guidelines in place.
SEBI’s guidelines aim to make sure that everyone shares the risk and loss more evenly during a crash. They don’t want some investors to have an unfair advantage by being the first ones to sell off their investments.
The announcement of these guidelines sparked discussions on social media regarding the possibility of halting or restricting the selling of investments during a crash. However, the lack of a clear answer arises from the severity of the crash and its underlying causes. Therefore, SEBI guidelines aim to ensure fairer impact sharing during crashes, but outcomes depend on severity and cause.
What should Mutual Fund SIP investors do?
Smart investors should not fret about the current market buzz, as long as they adhere to fundamental rules of investing.
By carefully choosing mutual funds, diversifying their portfolios, opting for SIPs, and investing long-term capital in small and mid caps, they can remain unaffected by external factors like regulatory changes or market downturns.
Investors who already practice these strategies confidently navigate any market conditions, regardless of regulatory interventions or fluctuations.
If you want evidence, just examine the historical SIP returns of any small-cap fund. Take Nippon India (formerly Reliance) Small Cap, a renowned small-cap fund with a long track record. Over the last decade, it has delivered SIP returns averaging 26.3% annually. To illustrate, an SIP of Rs10,000 per month would have grown from Rs12 lakh to Rs 48.4 lakh. While this fund stands out, several others have also performed admirably. Out of the nine small-cap funds with a 10-year history, seven have achieved annual returns exceeding 20%!
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing in mutual funds.
