Trader's Diary: Sebi directive on multicap funds could fire up mid and small caps

Nothing exists in a vacuum and the beginning of the end for the steroidal move post 2014 in small and mid caps started in late 2017 with the first tughlaqnama from a regulator who felt the need to wade into investment decision making because some rogue players thought the rules could be bent at will. Well, some three years later a second tughlaqnama tries to correct or plug holes left by the first. But guess what, tughlaqnamas have a fatal flaw, their collateral broad brush damage is sometimes worse than the excesses they try to address.

Now, a new churn will likely ensue that might allow for some promoters to indulge in fund raisings that would transfer public money garnered by fund houses to corporates or private hands, not necessarily based on performance or worthiness but on arbitrary percentages of allocation or ease of deployment. While the intent of the regulation might be to provide "true diversification", the real life issues of size and liquidity might be the restricting factors to follow the law in spirit. It is also possible that some allocators are just lazy and mimic their large cap funds while others might harbor misplaced ambitions reflected in concentrated holdings in few names. But to straight jacket the art of investment isn't to my mind the right solution, performance then becomes uniform and often mediocre and market lose their incentive for efficient discrimination.

Between now and February 2021, a lot can change and the six month revival in the small and mid cap space could get a steroidal booster shot by these anticipated forced churns. Equally, we remain just a solitary event away from pricking a growing bubble that must eventually burst. Then, if liquidity dries up, this tuglaghnama is likely to produce some unforeseen outcome, because they almost always do.