Should you cut your losses in small and midcaps or ride out the storm? Vinit Sambre answers

"So, frankly, the inflows as far as the funds are concerned have not really got affected, maybe some marginal changes which one cannot call it a trend as of now, that is number one," says Vinit Sambre, DSP Mutual Fund.

The time to panic in small and midcap stocks is it over or you can still churn your portfolio out of small and midcap stocks? I mean, everyone saw this coming, it is just that when it hits you, you regret.
Vinit Sambre: See, basically, first of all small and midcaps in general as I have been telling that these are categories which had to be looked from a long-term perspective and last three-four years were very strong for across the equities and it is time for some reversal as of now and when I actually think about a lot of the factors which we keep monitoring, the most important factor comes about is the growth in the earnings and this is the first time after a few years we are seeing moderation, cuts have happened, more importantly results are actually reflecting what is happening as far as earnings are concerned which was not happening over the last three years.

So, to some extent this should be considered as a good healthy kind of a correction linked to how the fundamentals are changing. Now, what you mentioned whether one should panic or not panic, I would say that large part of the returns which came about over the course of last three years were also a factor of liquidity and new investors coming in and I believe that while we have seen cuts to some extent linked to the fundamentals, but cuts linked to flow, sentiments, those could still overpower as people see returns getting derailed for a longer period and that is where maybe some bit of more volatility could be there as far as the category is concerned.


But as I keep saying good companies, good businesses they will last all the volatility and they will keep creating wealth for the investors. So, from that perspective, I would say that it is more not about the levels of the market but your ability to stomach these volatility and stay put with some of the fundamentally strong businesses is what I would advise.

A lot of follow-up questions on perhaps the basic approach for small and midcap stocks. First, I will start with the AMC which is at the industry level. Are there any signs of redemptions or SIP cancellations in small and midcap stocks because performance will always attract returns and underperformance will always lead to panic. So, so far what has been the score card for your AMC and what do you think is happening in industry specifically to inflows into small and midcap stocks?
Vinit Sambre: So, frankly, the inflows as far as the funds are concerned have not really got affected, maybe some marginal changes which one cannot call it a trend as of now, that is number one.

Where we have seen maybe the volumes getting a bit dry are maybe at the PMSes level, the HNI level.

There, there is a first kind of a big maybe market shift which some of the new investors are also witnessing, maybe they are waiting and rethinking about how one needs to reallocate.

So, I would say that if this sustains continues, it will definitely drift down to the funds as well to some extent and this is all cyclical and let us say if the visibility because of budget or whatever event actually leads to some improvement, may not have that big an impact on the flows, but till now we have not still witnessed a big change as far as the flows are concerned. I mean nothing great to talk about as of now.

Are you maintaining strong levels of cash in the small and the midcap portfolios or you are fully invested and you are not looking at changing your portfolio rejig within the small and the midcap?
Vinit Sambre: So, the stance which we have always had is that we generally remain invested, but especially in small and midcaps we have always kept between four to five cash as a strategy just to maybe have some kind of liquidity at any point in time.

So, we are just on that, maybe in smallcap we have raised marginally beyond this 4-5%, we are around 6%, and hence this fall we are actually monitoring very keenly wherever we feel that opportunities are emerging, valuations are becoming decent, where the businesses we like but we did not like the valuations, we are definitely looking to add into those.

For someone who has exposure to small and midcap stocks now, there are three options. One, take a hit, cut your loss or take less profit and get out. Second, add more as small and midcap stocks have fallen and third is convert it into largecap, switch. What should be a best strategy for someone who has small and midcap stocks and when I say someone, everyone who has got small and midcap.
Vinit Sambre: So, let me be very frank and open about this and if you are talking of the smallcap stocks, not funds, generally it is a tendency that as the bull market keeps progressing, the quality of investment keeps getting downgraded and even let us say poorly run business or poor businesses generally they show up good numbers and there also the narrative changes strongly.

So, a large part of the capital keeps getting drifted to businesses which may not be strong enough and are driven more by narrative.

So, I can say that a large pool of people who might have invested into smallcaps with not a strong understanding and not having understood the cycles for long, it is a clear call that they should move out of these smallcaps and if they want to remain in smallcap, it is a good category for long term, just go with the funds with a long-term track record is what I would suggest because this has been the trend and this is what we are observing also when we look at the retail shareholding pattern in lot of these companies, they have really gone up.

So, that would be my stance and the other point whether one should move to largecap, those are asset allocation tactical questions which would be pertinent for large investors, wealthy investors who might have had good amount of exposure to small and midcap and those exposures if they have gone out of proportion and are breaching their targeted kind of weightage, definitely they should shift to the largecap.

But somebody who has maintained a smallcap and wants to think about wealth creation over long term and is not breaching in a big way, I think it should continue, they should just sustain, maybe add more in the downfall. We have done analysis that in a falling smallcap category if one invest via SIP, they actually tend to create very good outcomes, even on absolute level if the index is low but on a SIP basis they would still sort of continue to show good returns because they keep averaging at a lower price point.

So, I would suggest that for really people with patience, long-term investment objective, they should continue and they should maybe add at the lows, keep adding at the lows.