Mumbai: Industry body Association of Mutual Funds in India (Amfi) has asked mutual funds to put in place safeguards to protect the interests of all investors in mid- and small-cap funds. Amfi sent this letter after markets regulator Securities and Exchange Board of India (Sebi) raised concerns of “froth building up in small and midcap segments” amid continuing flows in mid- and small-cap funds.
Amfi cited Sebi’s directive to fund houses, in a letter dated 27 February.
“In the context of the froth building up in the small and midcap segments of the market and the continuing flows in the small and midcap schemes of mutual funds, Trustees, in consultation with Unitholder Protection Committees of the AMCs, shall ensure that a policy is put in place to protect the interest of all investors,” the letter read.
Sebi has asked trustees of mutual funds to look into “appropriate and proactive” measures, including but not limited to moderating inflows, portfolio rebalancing, etc.
The regulator has also directed mutual fund trustees (through the Amfi letter) to consider steps to ensure that investors are protected from first-mover advantage of redeeming investors.
“With small-cap funds, investors that redeem later may also end up facing impact costs. When small-cap stocks are sold and there is lack of liquidity, the act of selling of such stocks itself can pull down their prices,” points out Mahesh Mirpuri, a Chennai-based mutual fund distributor.
The mutual fund trustees are given 21 days to approve such policies and put them on the respective fund house’s websites.
Steady flows in funds
Mid-cap funds currently account for ₹2.47 trillion worth of investor assets, and small-cap funds account for ₹2.9 trillion of investor assets.
In the last 12 months, mid-cap funds have garnered net inflows to the tune of ₹24,971 crore, while small-cap funds have got net inflows of ₹44,288 crore, according to data from Amfi.
In the past, certain small-cap funds have limited inflows amid concerns of expensive valuations in the segment. For example, SBI Small Cap Fund had stopped accepting lumpsum inflows in 2020. Last year, Tata Small Cap Fund had stopped accepting lumpsum inflows.
Valuations in the small cap space has been a concern even recently. The Nifty Smallcap 250 Index is trading at a one-year forward price-to-earnings (PE) multiple of 28 times, while its long-term average PE multiple is at 22.
This week, Kotak Small Cap Fund announced its decision to restrict inflows. The scheme will restrict inflows into its small-cap fund to ₹25,000 a month through systematic investment plan and lumpsum investment to ₹2 lakh from 4 March.
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Published: 28 Feb 2024, 09:10 PM IST