Is this rally in benchmark indices expected to spill over to mid and small cap stocks? What is your take?

Mid and small-cap stock prices plummeted post-2017 following a Sebi circular on categorisation and rationalisation of mutual fund schemes. Many of these companies came under pressure due to disruption, liquidity crunch, and technology changes. Promoters’ unwilling or unable to change with time saw their stocks fall off investors’ favor.

However, their stock prices started rising over a few weeks recently due to encouraging second-quarter results and hope among investors that Sebi’s circular will lead to money flowing into small and midcap funds. However, the latest option of converting multi-cap schemes to flexi-cap schemes could take away a large part of that trigger.

Wealth is created when a small-cap entity turns into a mid-cap company and later a large-cap enterprise. These stocks will continue to be monitored by analysts and investors. Despite a broad universe of listed stocks, only a few hundred of them will be actively tracked from this perspective.

Why is the stock market rally in India limited to a handful of stocks?

In the present disruptive world, business models of most companies have come under threat. Commitment of promoters for the long haul, and their skill in adapting to changing times is crucial. In a world where regulatory compliance is getting more challenging by the day, large companies are becoming larger, and the smaller ones are getting eliminated.

Once large-caps have seen a decent broad-based rally, we may see the rally spreading to small and mid-cap stocks; however, it may not be all-pervasive as in the past.

Is there any correlation between current economic fundamentals and the firm trend in select stock prices? Can it be called a ‘secular’ rally, or is it purely liquidity-driven?

Markets discount the future; however, the gush or absence of liquidity could affect valuations favourably or adversely compared to what it deserves. At times liquidity helps valuations, and at other times fundamentals drive them. A few months back, markets seemed to be driven more by liquidity than fundamentals; now, fundamentals have improved to justify that kind of valuation.

Most new investors during the lockdown were millennials. Their investments could be at risk, as many entered the market at high index levels. Will they ever come back or permanently avoid the stock markets if they become victims of a crash?

It is usual for a set of investors to suffer once the bull run is over. This time, the millennials, who have started trading or investing online during the lockdown, initially made some money as the markets were recovering from shallow levels. In case they remain disciplined, do their due diligence to an extent, and do not rely solely on tips from media or their network, they would still be relatively safe. The problem is that people tend to get carried away in frenzies and do not think wisely. They overtrade, don’t keep stop losses, and don’t follow money management rules.

While some badly hurt investors do not come back to the markets, most others have short term memory.  They come back, out of greed, to make money or recover past losses, mostly when the next rally begins or matures.

What is your advice to retail investors who have recently lost money in the stock market?

Retail investors have to learn a few things.

Be clear about the risks that you can bear:

• Have a figure of expected return in mind and commensurate with risks you are willing to take.
• Take out time to study the economy, markets and stocks. Do not rely just on tips, media, or hearsay.
• Learn from mistakes and try not to repeat them.
• Have an asset allocation plan and review the same twice a year to make amends to achieve goals.
• Review your trading and investment portfolio at regular intervals and dare to sell wrong picks even at a loss while at the same time booking profits in some others that have run ahead of time.
• Don’t overtrade just because transaction costs are falling.

What factors or developments does one need to watch out for during the next three-four quarters?

With a new president in the US, markets will closely watch the geopolitical situation, the pace of recovery of the global and Indian economy, India’s fiscal situation, asset quality stress, and credit availability to businesses and consumers. This apart, the progress or decline of coronavirus cases also needs to be watched closely.

Do you think retail investors should exit equity and invest in MFs to reduce their portfolio risk if they are not too market savvy?

If retail investors cannot devote time and attention to equity markets or cannot acquire the necessary skills to become better investors, they should take the mutual fund route and avail services of professional fund managers.