Taking cue from SEBI, the Association of Mutual Funds in India has directed Trustees of the asset management companies to put in place measures to protect investors interest in mid- and small-cap funds due to the froth building up in this segment of the mutual fund schemes.

In a communication addressed to mutual funds, AMFI said a froth is building up in the small and mid-cap segments of the market, and there have been continuous flows in these schemes of mutual funds.

‘Ensure policy’

“Trustees, in consultation with the Unitholder Protection Committees of the AMCs, will ensure that a policy is put in place to protect the interests of all investors,” it said.

It stated that AMCs and fund managers should take appropriate and proactive steps to safeguard investors, such as attempting to restrict inflows and rebalancing portfolios.

Steps should also be taken to ensure that investors are protected from the first mover advantage of redeeming investors, it said.

“The policy approved by Trustees should be disclosed on each AMCs’ website in 21 days,” said AMFI.

Interestingly, SEBI had approved three new fund offers on small-caps, which raised ₹2,353 crore in the December quarter.

In January, the inflows into small-cap funds more than doubled to ₹3,257 crore against ₹1,393 crore in December, while that of mid-cap was up 48 per cent at ₹2,061 crore against ₹1,393 crore.

FOMO syndrome

Mukesh Kochar, National Head of Wealth at AUM Capital, said the ‘fear of missing out’ syndrome is flocking investors to these segments as they have outperformed the entire market in the recent past.

With both segments in an overbought zone, fund managers are finding less reasonable opportunities to invest, and it makes sense to restrict fresh inflow, he added.

The asset under management of small-cap schemes increased by 89 per cent to ₹2.48-lakh crore in January against ₹1.31-lakh crore in the same period last year, while that of mid-cap was up 58 per cent to ₹2.90-lakh crore (₹1.83-lakh crore) in the same period.

Shrey Jain, founder & CEO of SAS Online, a deep discount brokerage platform, said four small-cap schemes have already restricted inflows, which reflects the proactive stand of mutual fund houses.

Take a 5-year view

Investors need to take a five-year view while investing in small and mid-cap funds with a staggered investment strategy, he added.

The quarterly inflows into small-cap funds have jumped 73 per cent in the December quarter to ₹12,052 crore against ₹6,932 crore logged in the March quarter of last year.

Similarly, the inflows into mid-cap funds increased 16 per cent to ₹6,468 crore in the December quarter against ₹5,574 crore in the March quarter of last year.

Vaibhav Shah, Fund Manager, Torus ORO PMS, said past returns generally lure new investors to invest in these segments without understanding the underlying risks.

In case of any liquidity event, he added that sharp drawdowns generally lead to bad investment experiences, and SEBI and AMFI are trying to curb any negative impact.