AMFI Addresses SEBI Concerns: Mid and Small-Cap Shares Dip 2% on February 28

On February 28, mid and small-cap shares faced a 2% decline, partly attributed to an advisory from mutual fund body AMFI.

AMFI, the mutual fund association, has communicated to fund houses in response to a recent communication from the Securities and Exchange Board of India (SEBI) regarding frothiness in mid and small-cap segments. The letter from AMFI urges trustees of all fund houses to pay heed to SEBI’s directives concerning schemes focused on small and midcap stocks. The primary emphasis of this missive is to prompt funds to establish robust policies to protect the interests of all investors, given the increasing frothiness in the broader market and the consistent inflows into schemes specializing in mid and small-cap shares.

The advisory urges asset management companies to implement policies safeguarding investors in small and midcap schemes. AMFI recommends measures like moderating inflows, rebalancing portfolios, and protecting investors from the first mover advantage during redemptions. Moderating inflows is crucial as continuous fund influx was driving stock prices higher through a self-fulfilling cycle. Maintaining liquidity in the scheme is suggested to mitigate the potential disadvantage for investors redeeming early and to address market concerns about increased selling by mutual funds.

This move comes as small and mid-sized funds experience substantial inflows, raising concerns among regulatory authorities about their resilience in the face of a potential sharp market selloff. The Securities and Exchange Board of India (SEBI) has taken note of these developments and is reportedly scrutinizing stress tests conducted by such funds, as indicated in earlier reports. This proactive approach by both AMFI and SEBI reflects a commitment to maintaining the stability and resilience of the mutual fund industry amid evolving market dynamics.

As the industry navigates these challenges, the importance of a collective effort to implement protective measures becomes evident. Investors and fund managers alike will be closely watching how these directives translate into concrete policies that ensure the integrity and security of investments in the mutual fund space, especially in the context of the current market conditions.

Yesterday, Kotak Mahindra Asset Management Company (AMC) made an announcement regarding restrictions on lump sum investments in its small-cap funds, set to take effect from March 4, 2024. Under these new measures, investors will be limited to a maximum lump sum investment of ₹2 lakh per month per person in these funds. Furthermore, while SIP (Systematic Investment Plan) and STP (Systematic Transfer Plan) registrations will remain open, they will be subject to a monthly cap of ₹25,000 per person. This move by Kotak Mahindra AMC reflects a proactive approach to managing the inflow of funds into small-cap schemes, aligning with broader industry efforts to address concerns surrounding frothiness in the mid and small-cap segments of the market. Such measures aim to strike a balance between facilitating investor participation and ensuring the stability and resilience of the funds amidst dynamic market conditions.

Kotak Mahindra Mutual Fund Imposes Limits on Small-Cap Investments: What Investors Need to Know