One of your scheme’s NAV has hit Rs 900. It must have started from Rs 10 a unit, I am assuming. How many years did it take? What kind of compounding did investors get if they held on to it for that entire period?
It has taken a little over 21 years and the compounding was 23.41% per annum. So it has been an incredible success story and those investors who stayed the course have obviously beaten every parameter that you can look at inflation, fixed deposit returns, anything else on such a thing. I think it reflects the growth of India because midcaps are India personified. The Indian story, the journeys of midcaps and domestic economy’s growth, is reflected in this fund. And that will continue because as we all know now, the focus for the next half a dozen years, is back on the domestic economy.
At 23% compounding, your money doubles in what period of time and if we hold it for say 10 years, every three years it is doubling if I am not wrong and if we hold it for 10 years, what happens and then if we hold it for 20 years what happens?
It is doubled in three years, so in six years it would have quadrupled and in nine years it would have become eight times. In 10 years you can see it has roughly probably been nine times and so what this reflects is effectively that at a 23% if you take the rate of tripling, this money has tripled your money three times right, from Rs 10 to Rs 900, it has gone up 90 times. So it is just the power of compounding. If you need to demonstrate to any investor who is entering the equity markets for the first time the power of compounding, I think this is a real live example for you to take and to show.
Also, the fact that it has been a journey of volatility as you know midcaps are often more volatile than largecaps and the volatility has meant that if you stayed for the long run, you still made a phenomenal return but more if you had done it through an SIP. There would have been innumerable corrections in the market thanks to the GFC or Russia-Ukraine war or Covid, which have given you a wonderful opportunity to buy into the scheme. So a systematic investment plan would have delivered phenomenal returns. It is a classic textbook case which should be used in every introduction to equity markets to new investors as an example of what compounding can do for you.
Let me come to the midcap, smallcap, end of the market. Sundaram as a house has championed midcaps, smallcaps way ahead of many in the industry. Now of course it is a full scale full service AMC but from 15 years, 10 years back when the specialisation was smallcaps. You understand the space well and that is why I am asking you this question. Is it a froth? Is it not right to generalise? How do you analyse small caps?
The right way to look at it is from two perspectives. Beauty lies in the eye of the beholder. So what glasses are you wearing to look at this? If you are looking at making a quick buck, if you are looking at a six month, one year, one and a half year kind of a time frame, then obviously the kind of liquidity that has flown into the smallcap and the mid cap space has made their valuations and their prices rise.
Clearly those who wanted to make a quick buck, the money has been made and they should just book their profits. If you have an outlook of the next one year, one and a half years, clearly there is froth because what has happened is that the floating stock in a smallcaps is far smaller than in a midcap and far, far smaller in largecaps. If you take the BSE 500 index, it is 500 stocks, but largecaps account for 75% of the market cap. Which means what? The top 100 stocks are accounting for 75% of the market cap. The balance 400 stocks are accounting only for 25% of the market cap. So the difference in floating stock clearly comes through. The massive rally that we have seen in smallcaps and lesser in midcaps is a function of the fact that from the middle of March, FIIs have been continuously pumping money into the stock market and largecap valuation has risen. Domestic fund managers, whether they be mutual funds or insurance companies or whoever, have been tending to sell the largecaps to the FIIs and reallocating that money into mid and smallcaps and that is one primary reason driving the rally. Second is the large amount of demat accounts which have opened are indicative that a large amount of retail investors kick started from Covid onwards with maybe a lot of time and money in their hands, have started trading and speculating in the stock market. These Robinhood speculators, obviously are going by tips in the market and buying those which are recommended through various fininfluencers. So they are going into the low liquid stocks and that buying, even a small amount of buying is kicking it up.
The third aspect is that given domestic investors have been increasingly buying SIP books and it is almost at Rs 16,000 crore this month, the volatility of the midcaps and smallcaps means that advisors and distributors have been recommending them to take SIP approach to the mid and small cap space. A lot of the increase in the SIP book has happened in the mid and smallcaps.
So what happens is that fund managers are getting money into mid and smallcaps every month and that cannot be used to buy largecaps because the rules are pretty strict. 65% of a smallcap fund has to be in smallcap, 65% of a midcap fund has to be in midcaps. So this increase in the SIP book around the mid and small cap means there is concentrated flow coming into it.
These three factors– reallocation of flows by fund managers as FIIs come into largecaps to mid and smallcaps; Robinhood speculators coming at the bottom end and buying penny stocks in the hope of quick gains and SIP book of mutual fund investors itself getting allocated into mid and smallcap means that there is a rush of liquidity in that segment.
While the story behind mid and smallcaps from a domestic economic growth perspective is the capex cycle driving it, the discretionary consumption cycle is expected to come and that is naturally good. The market has been buying those stocks with this hope for the future. Now, in the medium term, over three to five years, the earnings growth of smallcaps and midcaps will definitely achieve these expected EPS numbers because the valuations are reflecting expected EPS and beat them.
If you are an investor for the long run, then you do not worry about the current whatever you call as froth or the higher valuations on a trailing basis or the higher valuation of one year forward PE. If you take a three to five year outlook, you would still make decent returns from the mid and small cap space. The danger is that investors who come with a 12 months and 18 months view, if they see some kind of volatility and those same mid and small cap units at a lesser NAV, thereby adding to his wealth creation potential for the future.
An SIP investor should continue to stick at it. Any volatility that is going to come because of the so-called froth in the space is going to lead to a benefit for acquiring more units. The second aspect to bear in mind is the largecap space where Robinhood speculators might panic and tend to pull their money out. So what leads to a sharp rise in the stocks can lead to a sharp correction. But to an SIP investor, any such corrections which happen because of these factors means that he is able to buy as FIIs continuously put in money.
Now, FIIs are a function of the TINA (There Is No Alternative) factor. They are looking outside India and seeing India as a better bet. Now, oil prices are at Rs 91. The Fed is talking about rate hikes. So there could be short term volatility because oil is a big part in a hedge fund’s approach to India because there is currency impact because of oil increasing. There is also EPS impact.
If largecap FII investors tend to take out money, profit booking, and December is when typically hedge funds book profits, then mutual funds will tend to go in and buy when those largecap prices fall because they are getting good quality companies at better prices than a month ago or two months ago.
So that reallocation will mean that some amount of money may be pulled out of the mid and smallcaps by fund managers to buy those largecaps which are being sold by the FIIs. The mid and smallcaps could be in for a period of volatility. To the SIP investor, that is a great benefit. But to a short term investor with a short term outlook, I would say you better either stick to SIP as a route or you allocate to a flexi cap or a multi cap kind of a category.
What do you have to say about the SIP number itself? It has nudged closer to Rs 16,000 crore. The way momentum is right now, what is the potential of SIP numbers going up?
One of the key things we have to appreciate is the value that advisors and distributors, the mutual fund distributors, MFDs and the bank salespeople have brought in. What they have found is that most people get income on a monthly basis. Booking an SIP with them as an entity is much better than going and seeking a lump sum that is number one. The maturity of the distribution network has to be praised here in India that increasingly customers’ money is not being dumped into a lump sum, but being brought gradually.
This has multiple effects there. I see that this is like a self-fulfilling prophecy. All the SIPs over the last one year, from about Rs 12,000 odd crores in about a few months ago is now Rs 16,000 crore and that is a 25% increase. It has meant that it has been a good investor experience. Hence, this will feed into people increasing their SIPs even more. I would say that in a year from now, I would not be surprised if this SIP number were to touch Rs 25,000 crore a month. We would be really working on this growth pattern.
