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Here is how categorization has moved after Budget 2020. So now, #midcap funds can invest between 20,528 cr and 5535 cr. Over the next few weeks, this may well move down further. This can disrupt midcap focused mutual fund schemes significantly. 1/n
In March alone, try and fund out how many #midcaps turned #smallcap due to value destruction. And, try and find out how many #smallcaps turned #midcap due to value preservation. Neither was accidental. Both, were manmade in more ways than one.
Freefloat management is rampantly holding up valuations of a few companies. There are no regulatory answers to funds pursuing an acting-in-concert approach, one fund house buying 10% in a company (that's 40% of public SH) & other PIPE and global funds piggybacking on them. 3/n
The IPOs with lower public float were the perfect candidates to rig. Smart operators have turned it into a fine art to quickly orchestrate float mopping post IPO, getting research written to front run their eventual sale to fund houses. Look at IPOs & they will clearly smell. 4/n
The smart guys rigged midcap MF space cleverly picking outstanding companies to rig. They pick pedigreed IPOs & play them hard. MF’s kind of know beforehand which one will be rigged. This worked well till Corona. Now, the smarter operators sold out these stocks. MFs stuck. 5/n
The asymmetry in fund inflows & SIP’s towards #midcaps helped funds buy same stocks they own with fresh money. This put a back stop on valuations. Now, post-Corona, this isn’t going to be easy. With prospect of sustained volatility & weak growth forecasts, tough times ahead. 6/n
Nobody is even talking of redemptions. The prospects of redemptions in #midcap funds is not even hush hush conversation. But, it is inevitable. When it does happen, which stocks will funds be able to sell? If history is a teacher, funds always sell the better, liquid stocks. 7/n
When an economy slows, growth slides sharply and businesses struggle against macro headwinds, bigger firms are likely to hold up better. #Midcaps especially the better ones do hold up well too. But, market tend to get far stricter with valuations. That phase is starting now. 8/n
The last straw on a camels back is categorization. Nowhere in the textbooks is ranking a way of deciding which Co is a midcap. And, getting into top 250 can be passing, by chance or an accident. But, staying there isn't easy. Dropping out can be catastrophic. Forces MF exits. 9/n
Restricting investment universe to 150 stocks removed the enterprise factor in investing. It shrank the field, crowded players & encouraged cloning. PF's started looking similar. Downside- now, if a stock goes out of favour, everybody will be at the exit gate. Like migrants! 10/n
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