Further tightening its scrutiny on small-cap funds, the Securities and Exchange Board of India (SEBI) has now asked individual asset management companies (AMCs) about selling of such funds to super senior citizens.
The story was first reported in Mint.
A super senior citizen is a person who is 80 or more years old.
According to investment advisors, senior citizens or retirees should steer clear of mid- and small-cap funds as these categories can exhibit high short-term volatility.
Smaller-cap funds may have the potential to yield substantial returns over extended periods and, hence, are best suited for investors with a time horizon of typically at least seven years.
According to an executive at a fund house, the capital market regulator has sent emails to individual AMCs where super senior citizens have been shown to have invested in small-cap schemes.
The person added that many large AMCs have received the mail.
“The regulator is asking AMCs to get confirmation from such investors that they are aware about high risks in such funds,” the person added.
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An executive at another large fund house which confirmed to Moneycontrol that it has received SEBI's email said that currently, every mutual fund company advises its investors in its own particular way. “(However), industrywide discussions are happening on the way forward and whether a standard procedure could be achieved in this regard,” the person said.
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SEBI has in the recent past turned the spotlight on small-cap funds. The regulator has been concerned about the froth building in the mid-cap and small-cap segments in the stock market. To make investors aware about the risks, SEBI had last month asked the Association of Mutual Funds in India (AMFI) to instruct its members to conduct stress tests and publish the results on their own websites as well that of AMFI’s, once every 15 days.
The results of the first round of the mutual fund stress test were declared during March 14-15, 2024.
The tests show that it would take an average of about six days for mid-cap funds to liquidate 50 percent of their portfolios and about 14 days on average for small-cap funds to liquidate 50 percent of their portfolios if the equity market were to collapse badly, investors rushed for redemptions and liquidity in the markets dried up.
Further, as per data from research firm ACE MF, from February 2022 to February 2024, small-cap funds received net inflows of Rs 65,512 crore, while the mid-cap fund category witnessed net investments of Rs 45,562 crore during this period. In comparison, large-cap funds saw inflows of Rs 11,023 crore, stoking fears of froth in the smaller-cap funds.
In fact, riding unabated inflows into small-cap and mid-cap funds, net assets under management (AUM) of these categories jumped to Rs 2.49 lakh crore and 2.96 lakh crore, respectively. The total AUM of the lager-cap fund category stood at Rs 3.06 trillion as of February-end.
In the recent past, small-cap stocks have become volatile with many scrips witnessing deep correction. As per data available with Value Research, average returns over the last month by small-cap funds stood at -4.56 percent against a -0.07 percent fall in the large-cap fund segment.
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