The Mutual Fund companies are a big factor in the market. Because they run the money of the public. And in India, most of the general people invest in mutual funds. These Mutual Fund companies are regulated by the government throughSEBI, Securities and Exchange Board of India SEBI changes it’s regulations from time to time so that the Mutual Fund companies are under control. Therefore SEBI had made some new regulations for the Mutual Funds to keep safe the money invested by the general public.
The Mutual Fund companies run on the money of the general public. So they try their best to get the highest return on their investment. Because we the public buys Mutual Fund mostly by comparing the return of past two to three years. when the company has a good return in two to three years it comes to the top of the list. So, it is preferred by most people hence they have a high cash flow. And they only need that! You may think that it is a good thing to thing to earn a high return in a short period. No, it is not good.
Because in order to get more capital inflow from the public, they try to get more return by investing in Mid Caps and Small Caps. The large caps Mutual Funds invest in many Mid and Small Caps and the Mid Caps invest in many Small Caps. Because it can give them a high return. But there is also very high risk in the Mid and Small Caps. Because Mid Caps and Small Caps are very volatile and unstable. It can be Bearish in no time. And due to the liquidity crunch, it is very difficult for the Mutual Fund companies to sell these stocks. Hence their customers can lose their money.
Suppose an old gentleman doesn’t want to take high risk and invested in a large caps Mutual fund. He would think that his investment is safe and earn a decent amount of returns yearly. But the Large Caps Mutual fund may invest that fund in Mid and Small caps and try to earn a high return with high risks. So, it is a form of deception.
Therefore, the Government and the SEBI has made regulations to control that. From now onwards the Large caps Mutual funds would not be able to invest in Mid and Small Caps funds and Mid Caps fund would not be able to invest in Small Caps funds. In this way, the investor’s money will be relatively safe. And now these MId caps and Small caps hold by the Large and Mid Caps Mutual fund companies would have to sell their Mid and Small caps Stocks in a bulk.
When all the companies will sell their stocks in a short period of time there would be a sharp fall in the prices of the Mid caps and Small caps in the following month of 2018.