Monday, September 21, 2020

Changes to Multi Cap Mutual Funds by SEBI

The recent rule on expecting Multi Cap Mutual Funds to invest minimum 25% in each of the Large Cap, Mid Cap and Small Cap, is one of the worst rules that is brought by SEBI in the recent time. 

Post 2017, Multi Cap Mutual Funds is the only category, where AMCs have full freedom to invest in any stock. With this restriction, SEBI is curbing that freedom of AMCs. After this rule, there is no category, where AMCs have full freedom to invest in any stock. 

Not only SEBI is restricting the freedom of AMCs, it is forcing the investors to learn about Market and keep track of that. We can no longer just blindly trust AMC and invest. Before this rule, if any investor wants to invest, and if they trust on any AMC and they don't have any knowledge on anything else, they can just go with Multi Cap Mutual Fund of that AMC. With this restriction, they need to decide whether to invest in Large Cap, Mid Cap or Small Cap and change the investments based on the market. When AMC has freedom to change the investments, they can do it on behalf of the investors.

Another reason that is mentioned in the media is, the investments in Multi Cap Mutual Funds are like either Large Cap or Large & Mid Cap or one of the existing schemes. So, there is no need for another category. I don't know whether this reason is given by SEBI or not. This reason may look correct for those who are doing day trading or have very small duration for their investments. But, it won't work for those who are doing investments for the long term.

When freedom is given to AMCs, they may invest in the stocks that are going to perform better. When they do that, most of the time, that would match with one of the categories defined by SEBI. But, in a couple of years, when the market is changed, and if they think, other category stocks are going to perform better, the AMC may shift their investments to the other category. At any time, the Multi Cap may match with one of the categories, but, the main difference is, changing their investments based on the market from one category to another category. That basic freedom is removed from AMCs.

If SEBI wants, it can create a new category with this rule and let AMCs use the new category, if required. Or it can keep the present rule, but create a new category where the AMCs get full freedom on whichever stocks they want. 

In 2017, SEBI restricted the number of categories, forcing AMCs to offer only the basic categories and reduce the redundant categories. With this rule, Multi Cap is going to violate the principle that it had set. After this rule, instead of investing in Multi Cap, they can invest 1/3rd of that amount in each of the Large Cap, Mid Cap and Small Cap. If AMC is following the principle of having minimum strategies, then the return of the Multi Cap is exactly going to be the average of Large Cap, Mid Cap and Small Cap. Then, why do we need the Multi Cap category at all? We can remove that. 

In the same way, the Large & Mid Cap fund category is also redundant, because the AMC is forced to invest a minimum 35% in Large and 35% in Mid Cap. If the AMC has freedom to invest in any stock of Large & Mid Cap with 70% limit, then that category is of some use. But, with the present rule, investing in Large & Mid Cap is exactly the same as investing half of the investment in Large and another half in Mid Cap. 

I am not worried about the Large & Mid Cap fund, because it is just another redundant fund. What I am worried about is, removing the only category that was giving freedom. 

Before 1991, few officers in the government used to decide the IPO price. Everyone knows how bad it is for the stock market. This rule is also going in that direction, where few government officers are deciding what people need. 

All this may go in deaf ears, if there is some hidden reason for bringing this change. For example, if SEBI brought this rule to increase investments in Small Cap and Mid Cap, then irrespective of the correct logical reasons, this rule might not be changed. If there are hidden reasons like that, it is going to harm the country. 

"It will be a folly to ignore realities; facts take their revenge if they are not faced squarely and well." - Sardar Vallabhai Patel 

Sunday, September 20, 2020

Completed reading ISKCON Bhagavatham.

Completed reading ISKCON Bhagavatham.

I have taken 19 years to read the 18 volumes of ISKCON Bhagavatham.

Saturday, September 12, 2020

Worst Rule by SEBI - On Restrictions on Multi Cap

SEBI introduced one of the worst rules for the Mutual Funds. It is expecting multi cap mutual funds to have minimum 25% of the assets in each of the large cap, mid cap and small cap. Anybody who has little bit brain and maths knowledge can understand that, it is very very difficult for small caps to match the large caps. After the categorization of the mutual funds couple of years back, Multi Cap is the only type, where AMCs can invest in any stock they want. With this restriction, there is no type, where AMCs have full freedom to choose the stocks. Are we going back to Pre-1991 days?

Saturday, July 25, 2020

Managing Voter Perception

The following is an excerpt from the book, "India Unmade: How the Modi Government Broke the Economy" by Yashwant Sinha. 

Sometimes even a benign measure can have adverse consequences, like the national highway project. I later found that in 2004 we lost all the constituencies that lay along the Grand Trunk Road that goes from West Bengal and through Jharkhand, Bihar, Uttar Pradesh, Haryana and Punjab up to the Pakistan border. It was a paradox. The highways programme was the Vajpayee government's most outstanding project - his enduring legacy, the accomplishment now cited by even his staunchest political opponents - so we should have won in those very constituencies. We lost, however, because all highway encroachers were evicted. Even in my constituency of Hazaribagh, removing encroachers made a lot of voters angry. This is the political reality of India.

There is thus an argument to be made that there is no correlation between good work and getting re-elected. Any correlation is the first fallacy of punditry. Voting is only marginally connected to the work you might have done, or the government you were a part of. It is dependent on many other factors which may or may not work in your favour. 

The biggest factor is managing voter perception, a fact of which the Modi government is obviously keenly aware. Take the election in 1989, in which V.P.Singh overtook Rajiv Gandhi as Mr Clean because the Congress prime minister was bogged down by the Bofors scandal. Chandra Shekar as prime minister used to wonder out loud to me that V.P.Singh as Rajiv's finance minister had to have given approval to the Bofors gun procuremenet. Yet he was never stained by the scandal. Rajiv Gandhi's defeat by V.P.Singh was thus a result of perception management.

Saturday, July 18, 2020

Lies, damned lies and statistics

Say there are 100 people in a community and 5 of them are poor. The poverty rate is 5%. Say one of them dies of starvation. There are now 99 people and 4 of them are poor. The poverty rate is now 4.04%. The Leader puts out a celebratory announcement: The Poverty Rate has Declined by nearly 20%!
But is this really a good thing?
A similar trap awaits the unwary in the other direction. Say, again, you start with a population of 100, where only 5 are poor. The poverty rate is 5%. However, let’s say that these poor people are the strongest and healthiest of the poor. The weaker ones, especially infants, already died. The Leader pumps money into healthcare for the poor, focusing on reducing infant mortality. The next year the census reports that the population is now 105, of which 10 are poor. The poverty rate is now 9.5%. The opposition party puts out an accusatory press release: Under Leader’s Inept Rule, Poverty Rate Increase by nearly 100%!
But is this really a bad thing?
The error, in both cases, is confusing a 3-state variable for a 2-state variable. There are really three states: poor-living, non-poor-living, and dead. Looking at poverty rates fails to consider the dead state.