After SEBI, mutual funds body writes to fund houses to protect small and mid-cap investors

The Association of Mutual Funds in India, has asked Asset Management Companies to enforce a policy in order to protect investors in smallcap and midcap segments. This comes after Securities Exchange Board of India (SEBI) highlighted continuing flows to schemes in broader market leading to froth build up.

"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

AMFI directive

In the letter AMFI has asked fund houses and managers to take appropriate and proactive measures to protect investors and not limiting to moderating inflows and portfolio rebalancing.

The fund houses have also been asked to take steps to ensure that investors are protected from the first-mover advantage of redeeming investors. The first-mover hypothesis in effect assumes that redeeming out of a fund is costless—you get out because you’re worried about other investors redeeming ahead of you, and that’s that.

It further mentioned that the policy needs to be approved by Trustees and disclosed on each AMCs' website within 21 days of the letter.

In Flows

The high inflow into small and mid-sized funds have caused concerns 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.

Also Read: Mutual Fund inflows surged by 125% in 2023; may reach ₹100 lakh crore in a few years: ICRA

As per Moneycontrol, 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.

In 2023, small cap 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.