Why mutual fund AMCs are declining fresh lump-sum investments in small-cap funds — explained | Mint
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Business News/ Money / Personal Finance/  Why mutual fund AMCs are declining fresh lump-sum investments in small-cap funds — explained
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Why mutual fund AMCs are declining fresh lump-sum investments in small-cap funds — explained

Indian mutual fund companies are declining fresh lump-sum investment in small-cap schemes as the small-cap index has reached record highs

Mutual fund AMCs are advising investors to continue with their SIP plans but avoid upfront investments in indices at record highs. Photo: iStockPremium
Mutual fund AMCs are advising investors to continue with their SIP plans but avoid upfront investments in indices at record highs. Photo: iStock

Mutual funds investment: Amid Indian stock market climbing to a new peak in recent sessions, most of the benchmark indices including small-cap index has surged to record high levels, delivering stellar return to the equity investors. However, for surprise to some fresh mutual fund investors, some asset management companies (AMCs) declined to receive fresh lump-sum investment in small-cap schemes when Indian stock market was scaling new highs on a regular basis.

According to tax and investment experts, mutual fund AMCs declining to accept fresh lump-sum investment in small-cap mutual fund schemes is not a new phenomenon. AMCs discourage fresh upfront investment in any index fund when it is at record high. This exercise is aimed at ensuring the safety of their existing investors and maintain high yield of their scheme. They said that taking fresh investment at record higher levels in any index fund would lead to lowering of their annual yield that will hit return of their existing investors. So, they advised mutual fund investors to continue with their mutual funds SIP plans but avoid investing upfront in an index when it is at record higher levels.

Investors' safety in focus

On why AMCs are declining fresh lump-sum investment in small-cap schemes, Pankaj Mathpal, MD & CEO at Optima Money Managers said, "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 said that he won't be surprised if such practice is witness in other index funds as most of the indices are at record high in recent rally on Dalal Street.

Problems for AMC fund managers

Explaining the complexities involved while receiving fresh lump-sum investment in current stock market scenario, Mohit Gang, CEO at MoneyFront — a subsidiary of Niyogin Fintech Limited said, "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 invest at least 65 per cent of their corpus in 251st and below companies, by market capitalisation. In India, this universe, though large by volume is very restrictive and limited from investing perspective. Liquidity in these smaller companies is wafer-thin because of lack of institutional participation which in turn is owing to lack of good quality research in this segment. In case of market corrections, it becomes difficult for fund managers to manage 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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Asit Manohar
Chief Content Producer at Live Mint Digital Team
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
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Published: 15 Jul 2023, 07:54 AM IST
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