Re-Visiting Categorisation Of Stocks
Ever since the capital market regulator came out with categorisation and rationalisation of mutual fund schemes in October 2017, there has been growing demand from the industry to re-visit the categorisation of stocks. One of the reasons given by industry is that such strict definition of stocks has reduced the flexibility of the fund managers to invest and generate better returns for their investors. This is also reflected in the performance of mutual fund that are dedicated to small-cap and mid-cap. These funds have underperformed the frontline equity market since its implementation. We believe this might be a pure coincidence.
Our analysis of the entire equity dedicated mutual fund schemes shows that minor tweaking of the list will not give much flexibility to mutual funds in terms of diversifying their portfolio. Even in the current settings they are given enough flexibility to have a diversified holding. Our study shows that there are very few funds that are using the limit provided by the regulator to diversify their holdings to different market cap stocks. For example, large-cap funds that can invest up to 20 per cent of their corpus into companies beyond 100 have invested only 5 per cent at the end of January 2020.
To have a meaningful impact in terms of flexibility to mutual fund, the definition of the large-cap and mid-cap stocks need to be expanded by more than 50. Currently the top 100 companies in terms of market capitalisation is considered as large-caps, the 101st to 250th companies is considered as mid-caps and 251st onwards is considered small-caps. Moreover, we believe that it will be too early to consider change in the list again. Two years is a very short period to reach any conclusion about the rationalisation and categorisation of the scheme and its impact on generating returns.
Wealth creation through equity takes its own time. Our cover story this time does an empirical study on the returns provided by equity asset class since 1980 and it shows that even five years of investment period will not ensure a positive returns. Hence, if you want to create wealth by investing in equity, patience is your biggest virtue.
SHASHIKANT