Limit Inflows in Small, Mid-Cap Funds: AMFI to Mutual Funds

The Association of Mutual Funds in India (AMFI), an industry regulatory body for asset managers, has directed members to moderate inflows into small and mid-cap funds and protect investors against large outflows. This move was initiated after strong inflows raised concerns of a potential crash.

In a letter, the AMFI has made the recent request. It came after a communication from the markets regulator, the Securities and Exchange Board of India (SEBI), which has also asked assets management companies (AMCs) or fund houses to provide additional information related to risks associated with such funds. The AMCs or fund houses have 21 days to comply.

The country’s small and mid-cap funds have witnessed high inflows, raising concern among authorities about how they would hold up against the backdrop of a sharp market selloff.

The benchmark indices, such as the Nifty small-cap 250 index, have spiked 66.72% over the past 52 weeks, while the Nifty mid-cap 100 index is tipping at 59.34%. That far exceeds the benchmark NSE Nifty’s 26.69% jump.

The advisory could necessitate mutual funds to halt redemptions in a situation of sudden outflows or take steps to make their portfolio more liquid, by way of raising the amount of cash or large-cap stocks.

However, the analysts mentioned that stopping redemptions is an extreme situation and involves a long process that needs approval. 

To make the fund more liquid, some asset managers will be required to sell their current small and mid-cap holdings, state analysts. Generally, mutual funds keep between 1% and 5% of their assets as cash to address outflows, but there is no minimum regulatory requirement.

Funds are required to invest about 65% of their assets in small-cap stocks to be categorised as small-cap funds, and the other component of 35% can either be in cash or invested in large-cap stocks. Similar is the rule in the case of mid-cap funds, too.