Kotak Mutual Fund will restrict inflows into its small-cap fund to ₹25,000 a month through Systematic Investment Plan and lumpsum investment to ₹2 lakh from March 4.

Almost all the leading fund houses including SBI MF, Nippon MF and Tata MF have limited inflows into their small-cap funds due to sharp run-up in valuations amid unprecedented inflows. “We will review this call in the second quarter of this calendar year depending on better clarity emerging on some of these uncertainties or as more opportunities arise with the progression of the economy or valuations becoming more palatable,” said Kotak MF on Monday.

Over the next few months, many events are lined up, which will significantly impact financial markets. At least 64 countries will go through elections including India and the US. Globally, central banks have attempted to control inflation aggressively over the past two years, and the change in the US Fed pivot is still uncertain.

Prudent stance

While valuations are higher, the supply of new and quality papers through IPOs/QIPs is also limited. Though the Kotak Small Cap fund is positioned defensively with emphasis on quality of businesses, Kotak MF believes it is prudent to limit the inflows at this juncture, it said.

The Nifty Small Cap 250 TRI index has given a return of 66 per cent in last one year. Few stocks in the small and mid-cap segment have multiplied and the strong momentum is taking them beyond the fair value of businesses.

While market capitalisation/GDP is hovering at a lifetime high of 130 per cent, small caps’ market capitalisation to overall market capitalisation has climbed to 19 per cent from its historic level of 10 per cent. Retail investors’ ownership of the small-cap segment has also become sizeable, crossing even institutional ownership in many stocks.

Institutional investors, like mutual funds, exercise broad controls and invest in a disciplined manner. However, momentum chasing by investors, coupled with limited free float have created valuation distortions in a few cases. Such an experience is further boosting investors’ confidence, over-shadowing the caution required, said Kotak MF.

While the fund house maintains neutral stance on overall equities, investors can maintain prudent exposure through asset allocation to suit their risk profile and financial goals.

Investors can consider taking equity exposure through large-cap funds or hybrid funds such as Aggressive Hybrid category/asset allocation funds, it said.