Rushabh Desai, Founder, Rupee With Rushabh, says there is no need to panic now. Yes, liquidity can be a big concern, especially in lower smallcaps or the microcap segment. But the overall breadth of the market is quite decent. The liquidity in the mutual fund segment is being taken care of by the mutual fund houses. Also let us not forget that there are 40, 50, 60 stocks in a mutual fund portfolio. Today we are in a much more equipped time and age than where we were 10-15-20 years back. There is a lot of clamour in the market that these stress tests are letting the mutual funds churn their portfolios a bit, which is also leading to a lot of volatility in the market. What is your take? What exactly are those parameters that the Sebi has set out with respect to the stress testing and could it actually lead to a change or churn in the portfolio or not?
Rushabh Desai: Unfortunately, we are currently focusing on one parameter of what Sebi has said, which is the liquidity aspect. The parameters that Sebi and AMFI have told AMCs to publish from tomorrow. One is the portfolio liquidity. Second is the portfolio volatility. Third is the portfolio valuation, the overall market valuation.

At this point of time, there is no need to panic and worry. Yes, I agree with the fact that liquidity can be a big concern, especially in lower smallcaps or the microcap segment. But if you see the overall breadth of the market, it is quite decent. The liquidity in the mutual fund segment is being taken care of by the mutual fund houses and also let us not forget that there are 40, 50, 60 stocks in a mutual fund portfolio.

I pulled out some very interesting data. If you see the current liquidity scenario, the maximum number of days that it takes for a fund house to liquidate its portfolio is 65 days, which is the SBI Small Cap Fund and if you see the AUM in the SBI Small Cap Fund, it is around Rs 24,000 25,000 crore.

Now, on the other hand, in Nippon Small Cap Fund, which is Rs 45,000-46,000 crore, it is taking around 14 to 15 days to liquidate its entire portfolio when there is a redemption pressure. So, it depends on how the portfolio is being constructed in a smallcap fund. It also depends on the individual stock allocation and how liquid the stock is or how well it is traded on a daily basis in the market. That is something very important for investors to ponder on.

I want to understand the nudge coming in from the regulator side. A lot of the fund houses have been very successful fund houses running for decades, managing smallcap and midcap for the investor community for long. They would have developed their own risk management practices and framework very well too. How much further improvement can happen upon that?
Rushabh Desai: We survived the 2020 market crash and we survived 2008. Those were super deep market corrections. There is some froth in the market, in the mid and smallcap space but is this the right way to say that we are in a bubble? I would say no. I pulled out some very interesting data that Edelweiss Mutual Fund had published, over the past two years.

I am not saying that the mid and smallcaps are cheap or reasonable at this point, absolutely not. They are definitely trading at a premium over their long-term averages. But over the past two years, earnings have caught up and the price to earning expansion in the midcap space has been almost the same and in the smallcap space, the price to earnings has expanded around 10% to 15%. So, you are right in a way that today we are in a much more equipped time and age then , what we were 10-15-20 years back.

Mutual fund houses have their checks properly in place because we already saw a liquidity crisis in the debt market in 2020, in the whole Franklin fiasco. So, keeping these factors in mind today, I think mutual fund houses are very well equipped to deal with these stresses that markets can throw to the investors.From the investor’s side of view, are you hearing any clamour around their smallcap portfolio? Are the investors and the retail participants looking to liquidate some part of a smallcap, moving into multi-cap, flexicap or largecap category?
Rushabh Desai: I can specifically talk about my clients that we follow a very strategic asset allocation strategy, whereby we focus on the long-term aspect rather than the short term. At this point of time, looking at the flows we have seen over the past two years, where around 60,000 crores have been inflowed in the mutual fund space, especially in the mid and smallcap category. It is very natural to have some kind of profit booking or some kind of rebalancing in one portfolio.

But in terms of a lot of panic amongst my clients, over the longer term what we have observed is mid and smallcaps are the only category which can give better returns compared to largecaps. So, sticking to your asset allocation and not going too heavy on the mid and smallcap space is something I would recommend. Having a balanced, well diversified portfolio is the key because every market segment, whether it is large, mid and small will have cycles of outperformance and underperformance.