In a move aimed at boosting investor confidence and ensuring market stability, the Securities & Exchange Board of India (SEBI) has mandated increased transparency from asset managers regarding the risks associated with small and mid-cap mutual funds. This decision comes in the wake of substantial inflows into these funds, raising concerns over their resilience in the event of a sharp market downturn.
SEBI’s directive requires mutual funds to provide detailed information on potential redemption pressures, the impact of large outflows on portfolio value, and their liquidity strategy to handle such scenarios.
This initiative is expected to help investors make more informed decisions, especially given the recent surges in the Nifty small cap 250 and Nifty midcap 100 indices, which have outpaced the benchmark Nifty’s growth significantly.
Heavy inflows have sent the Nifty small cap 250 index surging 71% over the past 52 weeks and lifted the Nifty midcap 100 index 64%. That far exceeds the benchmark Nifty’s 28% rise.
The Association of Mutual Funds in India (AMFI) is collaborating with SEBI to introduce a standardized risk disclosure format, aiming for implementation from April. These disclosures, which will detail cash holdings and liquid assets among other metrics, are seen as a critical step towards enhancing market transparency.
In conjunction with these measures, AMFI has issued guidance to fund houses, urging the adoption of policies to safeguard investors from market volatility and the “froth” observed in small and mid-cap segments. This guidance includes moderating fund inflows and rebalancing portfolios to mitigate risks. Additionally, AMFI’s recent communication emphasizes the need for measures to prevent the first-mover advantage in redemptions, ensuring equitable treatment for all investors.
Several asset management companies (AMCs), recognizing the potential risks of unchecked inflows into small-cap funds, have already taken proactive steps. For instance, Kotak Mahindra Mutual Fund has temporarily restricted new subscriptions to its small-cap fund, a move echoed by Nippon India Life Asset Management and Tata Mutual Fund, which have also paused lumpsum investments into their respective small-cap offerings.
These developments reflect a broader industry effort to maintain market integrity and protect investor interests amid rapid growth in small and mid-cap fund investments. By requiring more comprehensive risk disclosures and encouraging AMCs to adopt protective policies, SEBI and AMFI aim to foster a more resilient and informed investment environment.
