Among many things, there is a recommendation with respect to restriction of SIPs and lump sum investments in mid and smallcap funds. What exactly is the implication of this?
Dhirendra Kumar: This is just alerting investors, creating sensitivity for the funds that have gone up substantially and this is the fifth year running where these smallcap funds are witnessing a double-digit growth of returns. But, I do not worry much about individual investors right now because the magical thing or the differentiated thing or the completely different thing this time round that is happening is that most of the inflow from individual investors is coming in by way of SIPs. It isn’t a seasonal one-time investment, not a sudden surge. So that is very comforting.

Most mutual funds were witnessing this massive inflow but nobody was willing to bell the cat. I spoke to a couple of fund CEOs and fund managers and they said that they do not want to be the first one to put the gate simply because investors will be provoked to pull money out of them out of fear. So, this alert coming from SEBI or AMFI will actually bring about some degree of sensitivity and all of them will act in tandem in terms of putting gates and this is good in a sense that people should not have unreasonable expectations from these levels in the short term, which is what is playing out right now.

The job of a regulator is to focus on investor protection and take care of market risk. I have rarely seen regulators come and talk about a category specific order or a notification. The regulator never gets into valuations, but this time around they are talking about valuations.
Dhirendra Kumar: Yes, they are talking about valuations simply because mutual funds have proved to be an island of promise in this market. If we can think of millions of happy investors, we will find them only in mutual funds. They don’t really want to disturb the apple cart. Creating this sensitivity might be good. Of course, most of the regulators do not ever alert on this.

So, should we consider this as more like a statutory warning, which is that be mindful of risk or is this more of a directive?
Dhirendra Kumar: No, it is more like alerting companies and investors. But most investors who are doing SIPs can just carry on with their plans because when you look at the 23% annualised return over the last 10 years, if you look at all the happy investors who are doing their SIP in smallcap fund, the phenomenal growth that they have witnessed, the smallcap universe which mutual fund used to invest five years back was close to 300 companies. Now that has grown to nearly 600 companies.

So, 300 to 600 and the growth of this market is entirely a function of sustained money flowing into it. Even now, all the small companies, some of whom will turn largecaps and some midcaps, and some of them will become global players. Promoters are the largest stakeholders in those companies. For many of these companies in which mutual funds are attracted and have invested heavily into, the prices have gone up. There the promoters still have 70-60%, they are the biggest shareholders and this is a chicken and egg story and mutual funds deserve this alert simply because the market is so shallow and this is the segment of the market where we do not have diversity.

This is the segment of the market wherein smallcaps NPS money does not flow in. In smallcaps, the EPF money does not flow in. Even FII money does not flow in. This segment of the market is entirely individual punters and mutual funds and for individual punters, the universe is large, nearly 3000 companies, but for mutual funds, it is 580 companies or so.