Causing a sell-off in small, mid-cap and micro-cap stocks on Wednesday, market regulator Sebi told mutual funds (MFs) to frame a policy to protect the interest of investors in small and mid-cap schemes.
In a letter to the Association of Mutual Funds in India (AMFI), Sebi said in the context of foam building in small and medium segments of the market and the ongoing flows in the small and medium schemes of mutual funds, trustees, in consultation. with Unitholder Protection Committees of AMCs, must ensure that a policy is put in place to protect the interest of all investors.
In the letter, Sebi said that AMCs should take appropriate and proactive measures to protect investors, including but not limited to moderation of inflows, portfolio rebalancing etc.
Steps should also be taken to ensure that investors are protected against the first mover advantage of redemption of investors, it said while directing that the policy should be approved and disclosed on every AMC website within the next 3 weeks.
The regulator’s directive, which was communicated to all MF houses, triggered selling pressure in the market with the Sensex falling over 800 points while Nifty also fell 1% to give its grip on the 22,000 level.
Indices related to small, mid-cap and micro-caps fell over 2% as Sebi’s directive may reduce the pace of flow of funds in the broader market.
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In the last year, smaller stocks have led the improvement on Dalal Street to take the market capitalization of all BSE-listed stocks closer to the $5 trillion mark. Nifty Microcap 250 index has almost doubled in value in the last 12 months. Nifty Smallcap 50 surged 77% and Nifty Midcap50 rallied 62% during the period against Nifty’s 26% gain.
Value investors have warned against the froth building in smaller stocks as retail investors are betting directly on small caps (without figuring out PE or PB levels) and also through small MFs.
“The ownership of retail investors of the small cap segment has also become extensive, crossing even institutional ownership in many stocks. Institutional investors, such as mutual funds, exercise broad controls and invest in a disciplined manner. However, momentum chasing investors, coupled with limited free. float available in the market, has created valuation distortions in some cases. Such experience further boosts investor confidence, overshadowing the caution required,” Kotak Mutual Fund said.
The fund house recently imposed a temporary cap on subscription of units in its small-cap fund.
Analysts suggest maintaining a moderate overweight stance on large-cap stocks, an equal weight on mid-cap stocks, and a moderate underweight on small-cap stocks.
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