All asset management companies with small- and mid-cap schemes must undertake stress testing of their portfolios at the earliest, according to two senior industry executives aware of the matter.
The market regulator doesn't see any systemic issues but wants stringent monitoring of schemes for potential risks.
The move follows the Securities and Exchange Board of India communicating with the mutual fund industry body, the Association of Mutual Funds of India, over the rising flows into such schemes. In the last year, small and midcap funds witnessed net inflows of over Rs 65,000 crore.
The mutual fund body wrote to trustees of mutual funds to take adequate action on flows to the schemes.
Among the steps suggested, asset management companies and fund managers have been asked to consider moderating flows and rebalancing portfolios, according to an internal letter sent by industry body the Association of Mutual Funds in India to mutual fund trustees. NDTV Profit has examined the letter, which isn't publicly available.
The Stress Test
AMFI will direct all mutual funds to undertake a stress test of the portfolio of small and midcap schemes. These stress tests need to be undertaken at the earliest and should be disclosed transparently on the website of mutual funds and AMFI, said one of the persons cited earlier.
A stress test for all schemes will be displayed along with the information memorandum of the scheme so that it's available to retail investors to assess the potential risk before investing in these schemes.
It will be the responsibility of the trustees to ensure a periodic or monthly stress test of the scheme portfolio is undertaken and displayed on their website. The results need not be presented to the regulator, as the regulator will monitor all the publicly displayed disclosures.
AMFI mandates a stress test of all schemes under the small cap and midcap categories. The mutual fund body will be required to come up with uniform parameters for all mutual funds to run stress tests across schemes. These disclosures will be in addition to the risk-o-metre disclosed along with the schemes.
The results of the stress test should be disclosed by the end of the month, said the person cited earlier.
Higher Exit Load
The market regulator does not intend to interfere in the functioning of the AMCs and their business decisions. The measure follows a recent run-up in small and midcap stocks, leading to increased monitoring to ensure there is no systemic issue in any segment of the market.
Sebi does not want to impose any exit restrictions but exits should not harm long-term investors. The AMCs may need to impose a higher exit load on small- or mid-cap schemes for investors looking at short-term investments, said the person aware of the matter. Exit loads can be dynamic, like the total expense ratio, depending on the duration of the investment, the person added.
SEBI wants monitoring of flows into small- and mid-cap funds as part of abundant caution, said the person, adding that there are many first-time investors who have entered such mutual fund schemes, and their trust needs to be protected. The regulator also doesn't intend to regulate any commissions from distributors.
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