Some pre-emptive action by regulator is good: UTI Mutual Fund’s Ajay Tyagi

“This caution today may help us in terms of preventing the situation getting into absolute bubble directly and then facing much more dire consequences down the road," said Ajay Tyagi of UTI Asset Management

Observations by the Securities and Exchange Board of India on stretched valuations was one of the key reasons for the selling in small- and mid-cap stocks over the past three weeks. Most fund managers said the selling was a welcome move to cool certain segments of the markets.

In an interview with Moneycontrol, Ajay Tyagi, head of equities at UTI Mutual Fund, said Sebi’s cautionary talk may help prevent the situation from developing into a bubble and then facing more dire consequences. He added that the regulator’s take has had a signalling effect, which can be a very potent tool to prevent the froth from building up.

Mutual funds have been asked to carry out stress tests and disclose their numbers in small-cap and midcap funds to show how they can deal with redemption pressure.

Also read: Stress test disclosures for small and midcaps funds to be announced on March 15: Madhabi Buch

Edited excerpts:

Are you worried about the outcome of stress testing?

Our mid- and small-cap schemes are not very large compared to those of some peers that have very large schemes. Our mid-cap scheme is just about Rs 10,000 crore; our small-cap scheme is just about Rs 3,000 crore. Our number of days are very low. So, we're not stressed about it because our investment committee has already been looking at our liquidity profile of all of our equity and debt funds every month.

What impact will regulatory talk and action by Sebi and the Reserve Bank of India in recent weeks have on market sentiment?

Whether it's the capital market regulator or the banking regulator, Indian regulators have always been extremely cautious. I've been in this industry for 24 years. I can count many instances where either RBI or Sebi came out and tried to pre-empt an event. When you pre-empt an event, you would obviously be protecting the overall system.

What is causing this nervousness in small- and mid-caps?It is always the valuations that lead to a trigger. The segment had been overvalued for quite some time but is now seeing corrections. This was bound to happen. There may also be some profit booking. In addition to this, the Sebi directive may have added to some nervousness. 

Do you expect selling by mutual funds as a consequence of stress testing?

This is unlikely as Sebi has not asked mutual funds to take any such steps and have just asked for the disclosure so that investors can be aware of the risk. So, there should be no immediate selling. The only point where this could happen would be if investors start redeeming.

Given that our markets are still young, some amount of pre-emptive action by the regulator is not bad. The regulator is not telling the mutual funds to stop flows but is pointing out that there is merit in revisiting the entire portfolio construction for mid- and small-caps.

What’s your view on the market now?

We don't try and predict what the markets will do, which sectors will do well over the next few months. As of now, the charts are telling us that we are certainly overvalued.

Also read: Jefferies calls smallcap, midcap selloff as healthy correction, not a larger meltdown

Where do you see overvaluation?

The magnitude of overvaluation is different in different parts of the market. Currently, large caps are the least overvalued and then mid-caps and then small caps.

Where do we go from here? Will 2024 deliver positive returns?

2024 could be a year of consolidation or even a correction.

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