NEW DELHI: The Securities and Exchange Board of India (Sebi) is open to revising rules for the mutual fund industry investing in small-cap stocks amid growing concerns related to over-stretched valuations and sudden dumping of shares in this category.
The capital market regulator will review its rule that mandates small-cap and mid-cap funds to invest a minimum of 65% of their assets in such stocks if fund managers find it is restraining risk management, said Sebi Chairwoman Madhabi Puri Buch on Monday. As per the norms, the remaining amount can be further invested in mid-cap/small-cap shares with some allocation to large-caps, cash and other assets.
Buch’s comments come weeks after Sebi told mutual funds (MFs) to frame a policy to protect the interest of investors following a sell-off in small, mid-cap, and micro-cap stocks. Sebi and AMFI, a body representing the mutual fund industry, have now directed fund houses to provide additional disclosures for small and mid-cap funds from this month.
The additional disclosure parameters for mutual fund managers include valuation, volatility, investor concentration and stress tests.
Since early 2023, the Nifty small-cap 100 and mid-cap 100 have risen 58% and 54%, respectively, outperforming the 23% rise in the benchmark Nifty 50. However, in the last one month, the small-cap index has plummeted by more than 5% while the mid-cap index has given a negative return.
Mukesh Kochar, national head, AUM Capital, said this is a welcome move if done as this will help the fund managers in reducing the downside risks of the portfolio in a market like this. “The AUM of small-cap funds has grown more than manageable without impacting cost on both sides and hence, it is prudent to allocate some portions of the fund to larger companies to manage liquidity and reduce impact cost. Many fund houses have restricted new flows in their small-cap fund and that is good, although this must have been done a little early,” added Kochar.
The net assets under management in small-cap and mid-cap funds were Rs 2,49,079 crore and Rs 2,94,490 crore, respectively, in February 2024 as compared to Rs 1,31,586 crore and Rs 1,83,246 crore in the year-ago month.