Mutual fund regulator turns cautious on small and mid-cap schemes — here's why

Taking cognisance of a significant influx of funds into small and mid-cap segments, the Association of Mutual Funds in India (AMFI) has issued an advisory to mutual funds, said DP Singh, Deputy Managing Director (MD) at SBI Mutual Fund on Wednesday, February 28.

AMFI's cautious approach reflects the industry's efforts to navigate the challenges posed by the heightened interest in these specific fund categories.

"I am not saying this is a diktat from SEBI because ultimately all of us want that the investors' interest should be protected," he told CNBC-TV18.

His comments follow the regulator's move to demand increased information disclosure from asset managers regarding risks associated with small and mid-cap funds.

Investment committees have been urged to disclose information on how they plan to accommodate large redemptions, the potential impact on portfolio value, and the liquidity held to meet outflows, according to a Reuters report.

The move aims to caution against the rapid inflow of funds, outpacing available stocks with limited viable investment opportunities.

Singh added that asset management companies (AMCs) stopped accepting lump sum inflows into small-cap funds since 2017, opting for Systematic Investment Plans (SIPs) up to ₹25,000.

He noted, "Money that is flowing in is outpacing the stocks. Also, good businesses at the right valuation are limited. So, this is just to give a caution note to everybody that this is something that needs to be done."

Singh advised that each fund house should evaluate its risk position, and the advisory suggests funds might need to implement curbs based on their risk parameters.

He stressed that SBI Mutual Fund is managing its inflows and outflows effectively, but others may need to consider implementing restrictions based on their circumstances.

He explained, "For somebody else who's getting much more money coming in looking at the past returns, they will definitely have to think about it on how to put some curbs in their fund house."

AMFI, in collaboration with SEBI, is reportedly proposing a standardised format for risk disclosure, expected to begin from April.

Funds, as per public documents, usually maintain 1% to 5% of their assets as cash. However, there is no minimum regulatory requirement.

The proposed disclosure format aims to provide investors with vital information about the liquidity position of funds.

Earlier this week, Kotak Mutual Fund announced restrictions on lumpsum investments in its small-cap funds.

The same will be effective from March 4, 2024. Fresh lumpsum investments, including additional investments or switch-ins, will be capped at ₹2 lakh per PAN (first holder or guardian) per month.

Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) registrations will continue with a monthly limit of ₹25,000 per PAN for various frequencies, the fund house said.

Kotak Mahindra Mutual Fund highlighted the multiplication of certain small-cap and mid-cap stocks, leading to momentum-driven valuation distortions.

Notably, SBI MF, Nippon India Life Asset Management, and Tata Mutual Fund have taken similar measures in the recent past.