2017, has been a good year for Indian stock market so far and sensex has already crossed mount 30k. It has been the same story for most emerging markets across the world. We saw good gains in rural, real estate & FMGC sectors while automobiles, pharma & IT remained sluggish.
The big question in everyone’s mind is how far this rally is going to continue & what sectors to invest now.
This is an economic story of a middle class person in India (perhaps across the world). He (no offence ladies) earns day & night, gets food, pays bills and save a little in the bank. He continues this for many many years after all he has been told by parents to work hard & live an honest life. But after many years, he realizes that after so much efforts, he is just able to meet ends and a little bit of savings here and there. He is never sure if he is financially independent or not. But wait, what went wrong here? I did what everyone else is doing and as hard as it gets.
Well, the answer lies in our “not so perfect” education system. We are taught Moral Science, History, Chemistry & what not (trigonometry yikes!!). Alas, no one teaches us the concept of Money, how it gets created or recycled but every time ends up in the hands of rich people (Confession: I have read Rich Dad Poor Dad). Money Management is a mandatory skill for everyone but for some strange reasons, only Commerce students get it. Coming back to this article, how to get ahead of this rat-race & create a little bit for ourselves is essential.
It can take a whole day to explain but then picture says thousand words, I don’t have any animation today but have a table which represents events during an imaginary football match between You and Rest of Economy. Wear your specs, over to the table.
Recently, DSPBR Micro Cap fund restricted fresh purchase or SIP. It created a lot of inconvenience to people who were planning to start new SIP or a lumpsum investment. It was followed by Mirae Asset Emerging fund also to restrict fresh purchase. We believe more small cap funds can join them in restricting fresh fund inflows. The reason fund managers are giving is that they can not find stocks to park fresh inflows.
But why is that so? Let’s try to understand.
Lets say DSP BR Micro cap has 5,800 cr as on today. If average small cap stock has a market capital of 500 cr. In that case, if fund has to deploy even 1% of their cash into a stock, they will end up buying 58 cr worth of stocks and result in owning more than 10% of that company. Also it is not practical to buy 10% shares in less liquid stocks simply because there are not enough shares on the exchange.
Another logic given by investor is that they can invest in more stocks and own lesser percentage in those stocks? This is also not possible since if they start doing it, they will end up buying all kinds of stocks which they do not want to do. Also managing so many stocks is an added burden on fund performance.
This is the same reason why Warren Buffet says he finds Indian markets less liquid to park his money. Since his slice of investment converted into indian rupees is till too much for even large caps indian stocks.
So what do small cap investors do now?
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