Sources familiar with the matter revealed that India’s Securities and Exchange Board (SEBI) has advised money managers to consider restricting one-off investments from clients in small and mid-cap stock mutual funds, as well as reduce commissions offered for their sale. The directive was communicated to money managers during a meeting earlier this month, with SEBI expressing concerns about the escalating inflows into Indian small and mid-cap mutual funds and potential ripple effects on the financial system if investors were to withdraw their funds suddenly.
Small-cap stocks in India are categorized as those with market capitalization below 50 billion rupees ($603.05 million), while mid-cap stocks range between 50 billion and 200 billion rupees in market value. Assets managed by small-cap funds surged by 86.5% over a 10-month period to reach 2.48 trillion rupees ($29.92 billion) by end-January, while mid-cap funds witnessed a 58.5% increase to 2.9 trillion rupees. These figures are not far behind the 2.99 trillion rupees managed by large-cap funds. The significant growth in these segments has raised concerns, especially given the substantial gains in small and mid-cap indices compared to the benchmark Nifty.
SEBI’s advice to institutional investors aims to alleviate excessive exuberance, particularly in small and mid-cap stocks. While SEBI did not respond to requests for comment, the industry typically complies with its directives.
Additionally, SEBI is encouraging asset managers to moderate fund inflows through various means, including reducing distributor commissions on small and mid-cap funds. Some asset managers have already halved these commissions, and SEBI is reportedly urging others to follow suit. Moreover, SEBI is advocating for the implementation of measures such as imposing exit loads or swing pricing to address large outflows effectively.
The Association of Mutual Funds in India (AMFI) has also taken steps to protect investors, including enhanced risk disclosures and stress test results. AMFI has requested fund houses to provide these disclosures by the 15th of each month.
