Kotak Mahindra MF limits lumpsum investments in its smallcap fund

Kotak Small Cap Fund is the sixth biggest scheme in the category with an AUM of Rs 14,426 crore.

Highlighting unease over the unabated inflows into smallcap stocks, Kotak Mahindra Mutual Fund has joined the growing list of asset management companies (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.

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According to the fund house, this move is aimed at safeguarding the interests of current unitholders and ensuring that incremental investments are made appropriately given the recent significant surge in smallcaps.

The AMC has restricted fresh subscriptions through lumpsum investments, including additional investment or switch-in in the scheme to Rs 2 lakh per PAN (first holder or guardian) per month.

Further, fresh registrations through Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP) or such other special products will continue with a limit of Rs 25,000 per PAN per month for daily, weekly, monthly and quarterly frequencies.

There would be no limit on the number of applications through SIP or STP-in. An investor can give multiple applications for SIP/ STP-in in the scheme, provided the total investment amount irrespective of frequency of all applications received on or after the effective date is less than or equal to Rs 25,000 per month per PAN.

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The Nifty Small Cap 250 Total Return index has returned 65.8 percent on a one-year basis till February 21.

According to the fund house, few stocks in smallcap and midcap segments have multiplied, and strong momentum is taking them beyond the fair value of businesses.

"Retail investors’ ownership of the smallcap segment has also become sizeable, crossing even institutional ownership in many stocks. Institutional investors, like mutual funds, exercise broad controls and invest in a disciplined manner. However, momentum chasing by investors, coupled with limited free float available in the market, has created valuation distortions in a few cases. Such experience is further boosting investors’ confidence, over-shadowing the caution required," Kotak Mahindra Mutual Fund said in a note to investors.

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The AMC will review this call in the second quarter of this calendar year depending on better clarity emerging on some of these uncertainties or as more opportunities arise with the progression of the economy or valuations becoming more palatable, etc.

Problem of plenty

Thanks to the rally in smallcap stocks, many mutual fund investors have been keen on investing in smallcap funds over the last three years.

In fact, 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.

Kotak Mahindra Mutual Fund isn’t the first one putting restriction on its smallcap fund. SBI MF had suspended lumpsum investments in SBI Small Cap Fund in September 2020 and is currently accepting SIP investments of up to Rs 25,000.

Nippon India Life Asset Management in July 2023 had announced that it will not accept lumpsum investments into Nippon India Small Cap Fund.Tata Mutual Fund had also announced that it has decided to stop 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 small cap stocks.

About the scheme

Kotak Small Cap Fund is the sixth biggest scheme in the category with assets under management (AUM) of Rs 14,426 crore as of January end. The top two funds in the category are Nippon India Small Cap (AUM Rs 45,894 crore) and HDFC Small Cap (Rs 28,607 crore).

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Since January 2021, the AUM of Kotak Small Cap Fund has grown more than five times from Rs 2,539 crore. During the same time, the AUM of active smallcap funds has grown four times from Rs 60,567 crore to Rs 2,47,549 crore.

In terms of performance, Kotak Small Cap Fund has delivered 38 percent, 25 percent and 28 percent returns on a one-year, three-year and five-year basis, respectively. On the other hand, category average returns have been 51 percent, 30 percent and 28 percent during the same period, respectively.

Smallcap stocks tend to be more volatile than their largecap counterparts.

Therefore, it’s very important that investors who are coming it smallcaps have a long-term view and have risk profile to withstand high volatility, if the newsflow becomes negative.