AMFI writes to fund houses citing SEBI directive on froth in mid and small-caps

For the whole calendar year 2023, smallcap funds saw net inflows of Rs 41,035 crore, while midcap funds saw net investments of Rs 22,913 crore. On the other hand, largecap funds witnessed net selling of Rs 2,968 crore.

Industry body, the Association of Mutual Funds in India (AMFI), has asked asset management companies (AMCs) to put in place a policy to protect investors in smallcap and midcap segments in light of the froth building up in the broader markets.

The industry body's letter to fund houses came after the capital markets regulator the Securities & Exchange Board of India (SEBI) highlighted continuing flows to schemes that invest in this category.

"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 AMFI letter dated February 27 said.

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AMFI has asked fund houses and managers to take appropriate and proactive measures to protect investors, including but not limited to moderating inflows and portfolio rebalancing, etc.

Fund houses have also been asked to take steps to ensure that investors are protected from the first-mover advantage of redeeming investors.

The policy needs to be approved by Trustees and disclosed on each AMCs' website within 21 days of the letter

Small and mid-sized funds have seen high inflows, causing concern among authorities about how they would hold up in the event of a sharp market selloff. The Securities & Exchange Board of India (SEBI) has also been reviewing stress tests conducted by such funds, according to earlier reports.

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Meanwhile, highlighting unease over the unabated inflows into smallcap stocks, Kotak Mahindra Mutual Fund recently joined the growing list of AMCs that have restricted or stopped lumpsum investments into their smallcap funds.

In a notification dated February 26, Kotak Mahindra Asset Management Company said that it has temporarily limited the subscription of units, including switch-ins, into Kotak Small Cap Fund with effect from March 4, 2024.

For the whole calendar year 2023, smallcap funds saw net inflows of Rs 41,035 crore, while midcap funds saw net investments of Rs 22,913 crore. On the other hand, largecap funds witnessed net selling of Rs 2,968 crore.

Nippon India Life Asset Management in July 2023 announced that it would not accept lumpsum investments into Nippon India Small Cap Fund. Tata Mutual Fund also stopped accepting lumpsum amounts and switch-in investments in Tata Small Cap in July last year.

More fund houses closing the doors for lumpsum investments in smallcap-focused schemes can be interpreted as the initial signs of investors going overboard on smallcap stocks.