Potential new regulation for investing in small-cap mutual funds
In light of mounting concerns over overvalued small-cap firms and abrupt share dumps in this market segment, the Securities and Exchange Board of India (Sebi) is amenable to changing regulations governing the mutual fund industry’s exposure to these stocks.
According to Sebi Chairwoman Madhabi Puri Buch on Monday, if fund managers feel that the capital market regulator’s requirement that small-cap and mid-cap funds invest a minimum of 65% of their assets in these companies is impeding risk management, the regulation would be reviewed. The remainder may be allocated as per the rules to cash, large-cap stocks, mid-cap and small-cap shares, and other assets.
Buch made his remarks a few weeks after Sebi instructed mutual funds (MFs) to create a policy safeguarding investors’ interests amid a sell-off in small-, mid-, and micro-cap companies. Fund companies have now been instructed by AMFI, a mutual fund industry association, and Sebi to start providing more disclosures for small and mid-cap funds this month.
The mutual fund managers’ extra disclosure standards including investor concentration, value, volatility, and stress testing.
The Nifty small-cap 100 and mid-cap 100 have increased by 58% and 54%, respectively, since the beginning of 2023, surpassing the 23% increase in the benchmark Nifty 50. But during the last month, the mid-cap index has returned negatively, while the small-cap index has dropped by more than 5%.
In a market like today, fund managers will benefit from this action, according to Mukesh Kochar, national head of AUM Capital, since it will lessen the portfolio’s negative risks. Small-cap funds’ AUM has increased more than manageably without affecting costs on either end, therefore it makes sense to deploy a part of the fund to bigger businesses in order to control liquidity and lower impact costs. It’s encouraging that several fund companies have limited new contributions to their small-cap funds, but Kochar said that this could have been done a little sooner.
In February 2024, there were Rs 2,49,079 crore and Rs 2,94,490 crore of net assets under management in small-cap and mid-cap funds, respectively, compared to Rs 1,31,586 crore and Rs 1,83,246 crore in the same month the previous year.
