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March 2, 2024

AMFI Urges Mutual Funds to Curb Inflows in Small and Mid-Cap Funds Amid Concerns of Overvaluation

The Association of Mutual Funds in India (AMFI) has issued a directive to mutual fund houses to curb inflows into small and mid-cap funds amidst growing concerns over the buildup of ‘froth’ in these segments, which could pose risks for investors.

In recent months, small and mid-cap funds have experienced a surge in inflows driven by the better-than-expected performance of companies in these segments. However, analysts have sounded alarms over the valuation of small and mid-cap stocks, prompting AMFI to take action to safeguard investor interests.

In a letter dated February 27, AMFI instructed mutual fund trustees to collaborate with the Unitholder Protection Committee of the Asset Management Companies (AMCs) to devise policies aimed at protecting investors’ interests in small and mid-cap schemes. These policies may include measures such as moderating inflows and portfolio rebalancing.

AMFI emphasized the need for proactive measures to shield investors from risks associated with the current market dynamics. The directive also stipulated that the policy decisions should be approved by trustees and disclosed on each mutual fund’s website within 21 days from February 27.

The surge in small and mid-cap segments has outpaced the broader market indices significantly. Over the past six months, the Nifty Smallcap 100 index has risen by 33%, while the Nifty Midcap 100 has surged by 24.38%, compared to the 14% growth seen in the benchmark Nifty 50 during the same period.

According to AMFI data, small-cap funds attracted net inflows of Rs 22,252.14 crore, while mid-cap funds witnessed inflows of Rs 13,042.1 crore between August 2023 and January 2024. In contrast, large-cap funds received net inflows of approximately Rs 1,577.04 crore during the same period.

Responding to the directive, Kotak Mutual Fund announced limitations on inflows into its small-cap funds starting March 4, 2024. The restrictions apply to various investment avenues such as Systematic Investment Plans (SIPs), Systematic Transfer Plans (STPs), and lumpsum investments, with specified monthly limits per PAN (Permanent Account Number) holder.

This move follows similar actions taken by Nippon India Mutual Fund last year when it ceased accepting lumpsum investments in its small-cap funds. These measures underscore the industry’s commitment to prudently manage investor inflows and mitigate risks associated with potential overvaluation in small and mid-cap segments.

Rajan Shukla

Rajan Shukla

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