Have the inflows for small and midcap schemes coming for March seen any pressure? Did you sense any panic amongst investors because this is one segment of the market which has seen phenomenal strength over the last 12 to 14 months? Are the flows going to remain strong or could there be an aberration?
Feroze Azeez: I personally think the flows can remain strong from a future standpoint. If you look at March 13-14, the day when smallcaps fell the most, if my estimate is right, about Rs 300 odd crore came into smallcap funds in total. Of course, that is an estimate. But flows are largely driven by past performance.

If you consider how investors behave in India, they do not just look at news and then decide whether their investment is going to go. So many people would not even know who is their fund manager, let alone who is the chairperson of SEBI and what he or she is saying. So, I personally think past performance is what drives retail investment.

Largely, financial literacy has created a paradigm shift in behaviour. I do not see any dent in the long-term thought process which investors have, unless the sentiment is bad and continues to be bad. March has had reasonable flows, positive is what my estimate is.

If all mutual funds are indicating that there is no stress, then what prompted Sebi to come up with this kind of a scrutiny?
Feroze Azeez: If you look at the kind of rally we have seen in the smallcaps, the smallcap index has outperformed Nifty by about 25-27% this financial year if I am not wrong, that is point one. If a rally like this happens at an index level, the constituents have tripled in NSE 500. There are about 35 stocks which are greater than 100 PE, there are about 70 odd stocks reater than 70 PE and so on and so forth. So, there is going to be scrutiny because some stocks are at extreme valuation levels as well.

But in the NSE 500 index, there is a stock with 10 PE as well. So, to get down to brass tacks is what Sebi has intended this time around, rather than at index level, going into fund level and finding out liquidity. So, point one, if you have such rallies, it is the regulator’s concern that new investors should not get a shock with larger falls and these kinds of shake-ups are very critical because during shake-ups like this, money or stock moves to steady hands. So, a certain correction is always good. Of course, that was not the intent of Sebi, but the shake-up really moves stocks into solid hands from those little impatient ones.Were you waiting for the outcome of stress test results to make up a view on AMCs and some schemes or is this something routine and you will not pay too much attention to it?
Feroze Azeez: I would definitely pay some attention to it because every fund is of a different nature. One of the key criteria we look at internally is the kind of free float, weighted average free float of each fund. If the free float is low, then the price discovery is low. So, every fund you can find out what is the average free float, weighted average free float of the portfolio, that is one thing we look at. Now in the smallcap space, we have free floats ranging from 59% at a fund level to as little as 17% at a fund level. So, if you are worried about liquidity, weighted average free float is one great barometer to check on the fund, that is one. Second, how much of the stock is in F&O? A portfolio like Quant Mid Cap, Quant Mid Cap has 71% of its weight in F&O. F&O stocks have great price discovery because there is a possibility of somebody wanting to take a bearish position without actually owning it. Short positions are possible.

So, price discovery in F&O stocks are so much better and that is why they do not have circuit limits. I would be more comforted if liquidity is my concern. I would definitely like to check this reading of what is my fund’s total exposure, weighted average exposure in F&O. Now coming to the fact of the entire stress test, I think it speaks of liquidation, it speaks of risk and I am so happy that in the public domain, we are finally speaking of risks at a fund level.

Standard deviation is something most investors do not understand. They do not understand what is beta, what kind of time it will take to liquidate. So, I am very happy that this kind of disclosure creates curiosity in the investors of trying to see both sides of the coin. It is not just about the return. It is about the risk as well and risk cannot always be in English high, medium, low and I am so happy that this is the first step where the regulator is forcing an investor and shaking him up to say, why do not you read what is the standard deviation, I am so happy in the risk or the stress test there is also one standard deviation, two standard deviations, three standard deviations mentioned and I thought that was another 10 years away for an investor to look at these sigma ranges and he is seeing it today and I am happy about that.

But I think there is one little drawback of our stress test. We assume that every fund manager is operating in a mutually exclusive market. All the volume of a specific stock will not be absorbed by one fund manager. So, if you look at the volume, all the fund managers coming together and they hold intersecting stocks. So, I think it is a great first step. A little more statistical betterment will happen over periods of time. But I am very excited that risk numbers are spoken far deeper today than they were just yesterday.