Why mutual fund AMCs are declining new lump-sum investments in small-cap funds?

Mutual funds funding: Amid Indian inventory market climbing to a brand new peak in current classes, a lot of the benchmark indices together with small-cap index has surged to report excessive ranges, delivering stellar return to the fairness traders. However, for shock to some recent mutual fund traders, some asset administration firms (AMCs) declined to obtain recent lump-sum funding in small-cap schemes when Indian inventory market was scaling new highs regularly.

According to tax and funding consultants, mutual fund AMCs declining to simply accept recent lump-sum funding in small-cap mutual fund schemes just isn’t a brand new phenomenon. AMCs discourage recent upfront funding in any index fund when it’s at report excessive. This train is aimed toward making certain the security of their current traders and keep excessive yield of their scheme. They mentioned that taking recent funding at report larger ranges in any index fund would result in reducing of their annual yield that can hit return of their current traders. So, they suggested mutual fund traders to proceed with their mutual funds SIP plans however keep away from investing upfront in an index when it’s at report larger ranges.

Investors’ security in focus

On why AMCs are declining recent lump-sum funding in small-cap schemes, Pankaj Mathpal, MD & CEO at Optima Money Managers mentioned, “AMCs are declining upfront fresh investment in small-cap schemes these days because small-cap index has been hitting fresh highs on a regular basis. Due to this, there is high risk involved in small-cap funds. If they continue receiving fresh lump-sum investment in small-cap schemes, then in that case fresh investor will be at high risk. Apart from this, this will lead to lowering of their small-cap scheme’s return, which will hit annual yield of their existing investors. So, AMCs are ensuring safety of both existing and fresh investors by declining fresh lump-sum investment in small-cap schemes.” He mentioned that he will not be shocked if such apply is witness in different index funds as a lot of the indices are at report excessive in current rally on Dalal Street.

Problems for AMC fund managers

Explaining the complexities concerned whereas receiving recent lump-sum funding in present inventory market situation, Mohit Gang, CEO at MoneyEntrance — a subsidiary of Niyogin Fintech Limited mentioned, “Small-cap category is now around ₹1.6 lakh crore category and fresh net flows are hitting all-time high numbers. In June 2023 itself category saw ₹5472 crore of net flows, highest across all equity categories. This has created deployment challenges for fund managers.”

Small-cap mutual funds by definition have to speculate no less than 65 per cent of their corpus in 251st and under firms, by market capitalisation. In India, this universe, although massive by quantity could be very restrictive and restricted from investing perspective. Liquidity in these smaller firms is wafer-thin due to lack of institutional participation which in flip is owing to lack of excellent high quality analysis on this section. In case of market corrections, it turns into tough for fund managers to handle redemptions (liquidity).

“Just consider an example of Nippon Small cap fund, which closed lumpsum purchases after touching an AUM of almost ₹29,000 crore. Largest holding in that portfolio is around 3.25 per cent (about ₹900 crore+) and that scrip hardly has a liquidity of ₹50-100K shares per day. And the more we go down the ladder, we see that most of the small cap holdings have marginal liquidity and in a scenario of forced-exit, there could be huge price distortions,” Mohit Gang added.

“A fund manager’s task is finding the right stock, getting the desired quantity and most importantly, keeping the impact cost minimal while buying or selling of stocks. Hence, good AMCs typically prefer restricting inflows so that they can manage all the three tasks neatly, keep proper liquidity and manage true-to-label nature of their schemes,” Mohit Gang concluded.

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Updated: 15 Jul 2023, 07:54 AM IST

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