Overheated Small, Mid Caps: Mutual Funds Say All Investors To Be Treated Fairly
Market regulator Securities and Exchange Board of India has asked mutual funds to get cautious amid concerns in valuations and rally in the small-cap space, asking them to follow certain steps to ensure investor protection.
The mutual fund companies have been asked to put steps in place to ensure that investors are protected from the impact of the first-mover advantage of redeeming investors.
What is the first-mover advantage? Simply put, it means that investors redeeming first get an advantage of a higher NAV during the time of redemption and those redeeming later get a lower NAV.
The market regulator wants to ensure that such circumstances do not arise, said multiple industry leaders to whom NDTV Profit spoke. "The steps are to ensure there is a framework in place and as of now, there does not seem to be a problem. It is more of a pre-emptive measure," said one of the persons quoted above.
Asset management companies and fund managers have also been asked to consider moderating flows and rebalancing portfolios.
"The idea is to put responsibility on the AMC to treat all investors fairly," said the head of a leading mutual fund on the issue of the first-mover advantage. "They don't want quality shares to be sold in the market to fund redemption and left with an illiquid portfolio. This does not mean we put a limit on redemption."
The mid- and small-cap category schemes have witnessed huge inflows recently, with some funds topping the active fund list by assets under management.
HDFC Midcap Opportunities and Nippon Smallcap Fund have been among the top five funds, according to Morningstar data, with their average AUM rising to over Rs 40,000 crore and Rs 30,000 crore, respectively, as of December 2023.
Nippon Mutual Fund, however, stopped lump-sum inflows into its small-cap schemes last year on the back of unprecedented inflows into categories.
"Fund managers need to keep the portfolio in more liquid names across market caps. If the view is bearish, each fund manager can alter his or her cash levels," said another top mutual fund chief executive officer.
Small-cap funds have a minimum requirement of 65% of allocation under the category, according to the SEBI guidelines. Most of the large AMCs' funds have around 70–75% of such allocations, according to a mutual fund's chief investment officer.
"Funds should be marked to NAV and valuation guidelines are strict. At best, every fund maintains like 30% in larger-cap stocks to provide exits. And even that doesn't work if you need 30% all the time... Because every redemption means you will sell some small-cap or the other," Deepak Shenoy of Capitalmind said on platform X. "Either way, smallcaps and midcaps must end up getting sold somewhat to accommodate this."
Interesting to see AMFI saying funds must protect investors from the impact of first moving exits.
February 28, 2024
How can you do this? Funds should be marked to nav and valuation guidelines are strict. At best every fund maintains like 30% in larger cap stocks to provide exits. And even that… https://t.co/jzE4Vzmjv6
-
Signature Play: The Classic Cocktail Is Dead. Or Is It?
Classic cocktails are disappearing from India's cocktail menus. But they're still being ordered, taught to bartenders and borrowed from. So, who's really having the last drink?
-
A New Samvat Wishlist: Inclusive Prosperity And Human Development
India has strengthened its economic foundations through infrastructure, digital access and enterprise. Its next growth chapter must deepen productivity, create better livelihoods and widen participation in prosperity.
-
Love, Sex Aur Dhokha: The Audacious Plot To Spy On Jensen Huang
A Taipei dinner, a Singapore chip buyer and a suspected Chinese asset: inside the alleged spy operation that got close to NVIDIA's Jensen Huang.
-
Ten Things I Learnt This Samvat
Patience can be a trap. Cheap stocks can stay cheap. Leverage can wipe you out. What did Samvat 2082 teach us? Niraj Shah writes on 10 lessons from the year gone by.
-
Talking Points This Week: Tech Nerves, FII Buying, And A Faraway Banking Shock
The global markets are not shining this Diwali. The exception in the large markets is, India.
-
Midterm Rally Lasted A Day. The Hard Reality Of A Divided US May Last Two Years | Opinion
Between a contested AI boom, a debt ceiling that arrives in 2027 and a president with every incentive to act alone, the next two years may prove more volatile than the first day's rally suggests.
-
Blue Wave Will Derail the AI Trade but Won't Dismantle the AI Era | Unhedged Position
The Democrats' sweep of the US Congress will see politics collide with economic forces both over the long and short term.
-
It's Time To Take The GST Council's Bet On Trust Global
Payment records can prove India's services exports, and clear, proportionate rules can bring foreign digital sellers into the tax net.
-
Opinion | India at 38: From Innovation Overperformer to Innovation Powerhouse
India now has 453 VC-backed deep science startups, 18 of them late-stage, after 117 percent growth since 2020. Laurus Labs, at USD 9.3 billion, is the most valuable deep science company in any middle-income economy outside China.
