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?