Crises
such as freezing of debt schemes and misuse of PoA by brokers have resulted in
a safer trading space
What can
move and shake the equity market is uncertain. The covid-19 outbreak was a
health emergency, but the policy interventions of slashing interest rates and
fiscal incentives mimicked those in a cyclical downturn. As is the norm,
export-oriented sectors led the revival. Profit-booking in the tech and pharma counters
trickled to commodities, infrastructure, and real estate. In a departure, domestic
consumption, too, was happening alongside. A good southwest monsoon and cheap
credit boosted offtake of fertilizers, insecticides, tractors, and housing products.
Another divergence was the varying performance of segments within the industry.
Health and hygiene products of FMCG companies sold briskly but not personal-care
solutions. Entry-level passenger vehicles were favored for mobility, but
commercial vehicles ignored due to movement restrictions. The rebound was quick,
unlike the four to five years of zigzag trajectory during the transition from a
bearish period into a bull run. The Nifty climbed up 21% in five months after
wiping out the loss on the way to the bottom in less than 11 months. The
benchmark expended 22 months to regain the January peak and 76 months to top it
with 21% wealth creation after the 2008 liquidity squeeze. Big-bracket
investors did not follow a secular strategy last year. After being overall buyers in CY 2018 and CY 2019, local institutions dumped shares even as FPIs net pumped
Rs 2.42 lakh crore in the 15 months till March 2021. The unabated Rs
93000-crore 10-month selloff in the 14 months to February 2021, with the
intensity tapering in March, by mutual funds was sparked by redemption pressure
from corporate and individual unitholders to conserve reserves. In contrast,
overseas accounts had access to ample no-cost cash searching for higher
yields.
What has
been left unsaid but inferred is the disenchantment with money managers. The
restlessness is despite the Securities and Exchange Board of India taking steps
to instill confidence in pooled investments. Spreading the distributors’ commission
replaced upfront payment to encourage long-term investing. A 1% advance fee per
annum for three years is only for SIPs of Rs 3000 or more per month to ensure
enlisting of serious investors. Inversely linking the total expense ratio to
the growth in assets under management aims to discourage proliferation of
copy-cat schemes. It took a series of crises for the realization that there are
no risk-free returns. The seizing of the credit market following the collapse
of IL&FS in 2018 resulted in side-pocketing of paper the day it is downgraded
to insulate the NAV of the rest of the scheme. After the freezing of six debt
schemes by Franklin Templeton AMC in April 2020 due to the pandemic-induced
rush to exit, the portfolio and yields of the underlying instruments need to be
disclosed fortnightly, and not monthly. Amortizing the coupon daily can be done
only for fixed income instruments of 30-day maturity. Those of a longer
duration are to be marked to market to know the realizable value. A fund house’s
exposure to a single issuer is 10% of the corpus.
Sloppy governance
is part of the problem. The other is the uninspiring track record. The median
one-year returns of the 10 best performing large-cap schemes at the close of
March 2021 were 40%, the highest being 49%. The NSE’s mainline index improved
68%. The top 10 performing multi-cap
schemes’ mid-range was 8%, with the upper end appreciating 17%. The BSE 500
climbed up 73%. Besides ease of online trading, the near doubling of growth
rate of demat accounts to 5.15 crore in the 10 months from end FY 2020 as
against 14% increase from FY 2019 is in no small measure contributed by the
desire of the ordinary investor for control due to the mismatch between expected
and earned gains, particularly after the cleaning up undertaken by the market
regulator to create a safe environment. The blowout in 2019 of Karvy Stock
Broking, which quietly sold members’ securities to fund real estate arm Karvy
Realty, was a turning point that led to reviewing the use of power of attorney
given by subscribers. Now securities will remain with the clearing house and
not transferred to the broker’s account. Since 1 September 2020, 20% upfront margin
is required from the client for every intra-day order as against the practice
of the platform provider often putting up the margin on the squared-up position
at the end of the day. Buyers and sellers will now have to wait till settlement
before executing a fresh trade. These reforms have emboldened the marginal player.
It is a triumph of David over Goliath.
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